Total value locked (TVL) in the Solana Network (SOL) decentralized finance (DeFi) ecosystem was $327 million as of Nov. 14, down from a peak of $10.17 billion in December 2021, according to DeFiLlama 96.75%.
TVL in Solana DeFi is gradually declining throughout 2022 due to the declining value of SOL and a larger market downturn. Since the beginning of 2022, Solana’s TVL has dropped by 95%.
Moreover, TVL Online has fallen by 63.21% in the past week alone.
TVL’s decline accelerated when FTX’s liquidity issues surfaced in early November. FTX has since filed for bankruptcy, while former Solana CEO Sam Bankman-Fried (SBF), who was widely supportive of Solana, exited the exchange.
SBF’s deteriorating public image amid the FTX bankruptcy and allegations of misuse of user funds has also affected perceptions of Solana. The Solana Foundation has over $30 million worth of assets locked up on FTX.
The foundation also claimed that, based on its assessment, the largest DeFi project on Solana had a “limited or no” impact on FTX. However, it added that there are a number of Solana projects affected by the FTX debacle that are working on potential solutions.
DeFiLlama data shows that among the top DeFi projects on Solana, the lending platform Solend has lost 87.6% of its TVL in the past week, with about $30 million currently locked in the protocol, compared to $284.33 million on the second day of November.
Liquidity staking protocol Lido lost 12% of its TVL this week, from $7.59 billion on Nov. 8 to $6 billion at press time. Meanwhile, staking protocol Marinade Finance lost 54.73% TVL for the week.
According to DeFiLlama data, decentralized exchanges Raydium and Orca lost 50% and 28.05% TVL respectively in the past week.
Stablecoin Regulation Signals the End of the DeFi Industry?
Since the concept of decentralized finance (DeFi) emerged in the crypto space in 2020, critics have pointed out that the field is not truly decentralized as its name suggests.
One of the hallmarks of the centralization of DeFi is that much of its economy is based on stablecoins.
To better understand the importance of centralized stablecoins to the DeFi space, let’s consider that over the past 24 hours, more than half of Uniswap’s trading volume was in the UDC-ETH trading pair. About 94% of assets borrowed on Compound are USDC, USDT, or DAI.
Although there are many projects intending to create more decentralized stablecoins, the reality is that major stablecoins such as USDC, USDT, BUSD, and DAI are backed by the number of assets reserved by institutions. Traditional finance is easy to manage. In other words, the government can bring down the DeFi economy with some regulation.
Latest comments from the Federal Reserve
At last week’s DC Fintech Week event, Federal Reserve Board (Fed) Vice President for Oversight Michael Barr made various comments about the crypto industry. While Barr sees a bleak future for crypto assets like bitcoin, he sees potential in stablecoins.
That said, Barr has hedged some of the risks associated with dollar-pegged crypto assets. Perhaps the most interesting thing, in Barr’s view, is that stablecoin issuers may not be able to track who is using their tokenized dollars.
“As banks explore different options for harnessing the potential of technology, it is important to identify and assess new risks in these models and whether they can be mitigated. Decide or not,” Barr said.
“For example, banks may not be able to track who is responsible for tokenized assets, or whether tokens are being used for risky or illegal activities. While technological solutions are being deployed to manage these risks, it is also an open question whether banks will be willing to comply with relevant laws.” The problem.
With these open-ended questions, banks may conduct controlled and limited trials of new technologies. These trials are often combined with regulators to regularly discuss the benefits and risks involved, ensuring compliance with the bank’s current operations and applicable laws.
This is not the first time that regulators or government officials have raised the issue of the use of stablecoins. In September 2020, the U.S. Office of the Comptroller of the Currency (OCC) provided guidance (PDF) for banks wishing to provide support to stablecoin issuers.
However, the OCC’s comments did not address the issue of non-custodial wallets holding stablecoins.
Recently, in the White House notice, the Ministry of Finance will complete the illegal financial risk assessment of the DeFi field in February 2023. In the same announcement, the White House noted that the development of a central bank-issued digital currency (CBDC) could support economic sanctions imposed by the United States around the world, especially given the boom in stablecoins in Russia.
Following data, Russia is increasing the use of stablecoins to evade Western sanctions, according to a report from blockchain analytics firm Chainalysis.
What will affect DeFi?
Currently, the agencies have no plans to enforce stricter KYC and anti-money laundering (AML) regulations on stablecoins in the United States. Hence, such a move could happen in the near future, as several lawmakers have been pushing for stablecoin regulation over the past year.
Stablecoin regulations will have a huge impact on DeFi. The highlight of DeFi applications is the ability to trade, borrow, and perform other financial activities without transferring personal information. This provides some benefits to end users and improves privacy, but this advantage is lost in the context of stablecoin users having to verify their identities.
Users will also need to account for miner revenue (MEV) and disclose their finances on the public blockchain, which are now directly linked to real-world identities. If this happens, many DeFi users may revert to the traditional centralized exchange model.
“If stablecoin transactions are governed by the Travel Rule, then centralized stablecoins will be basically the same as the PayPal transaction system,” Sovryn contributor Yago said.
“In this case, DeFi may split, some protocols will be closed (licensing), and others will become more censorship-resistant. However, closed DeFi protocols are not what everyone needs.”
The travel rule Yago was referring to was guidance from the Financial Action Task Force (FATF), the intergovernmental organization that fights money laundering. By following the Travel Rule, virtual asset service providers can help stop terrorism financing, stop payments to sanctioned entities and allow law enforcement to subpoena transaction records, detect suspicious financial activity reports, and prevent money laundering in the crypto space, the FATF said Activity.
Of course, stablecoin issuers like Tether can still play a role in their dollar-pegged tokens amid more regulation of the industry.
When asked about USDT’s value proposition, Tether CTO Paolo Ardoino said: “USDT will continue to be the most widely used stablecoin in the market as a stable and efficient way to move dollars around the world.”
“Tether has many different use cases, especially in developing countries such as Argentina, Brazil, Turkey…it can be easily transferred between exchanges or between users instead of using bank transfers. It is easy to buy and sell. Be a trader Often used as a way to hold funds on exchanges when markets are considered extremely volatile, Tether has also found utility in emerging markets where citizens use USDT against their “inflation”.
When asked about the potential impact of stricter stablecoin regulation, Ardoino avoided mentioning DeFi directly, instead pointing to the possible growth benefits of having more clear regulation.
“Stablecoin regulation will provide clarity to large corporations, financial institutions and fintech entering the cryptocurrency market. A more regulated and secure crypto ecosystem will benefit all involved and open many doors for new products to enter the market. “
While DeFi won’t disappear entirely with stricter KYC and AML enforcement for stablecoins, it will clearly cause the industry to shrink from where it is now, as most of the utility of DeFi will be obliterated after stablecoin regulation is enacted.