Since its inception, DeFi seemed to have a Midas touch. Growth was explosive, and innovations were constantly popping up. The competition wasn’t on if projects would come up but on the ones that would break the $100 million mark first. However, a recent bearish market has put a halt to the good times. At $111.88 billion by the time of writing, the total value locked has dropped by 53% from a high of $236.64 billion at the start of 2022. Yet DeFi is expected to get back on its feet. Read on to find out why. Understanding the Cause of the Plunge To best understand why DeFi is bound to get back to the good times, it is worth knowing why things fell apart in the first place. There are two key reasons; US Fed Actions The main cause of the current plunge has been the US Federal Reserve Bank (Fed) policy actions. The bank has announced far-reaching steps to combat a rapidly rising domestic inflation, with adverse effects on most investment properties. During the height of the Covid-19 induced economic downturn, the Fed slashed lending rates and pumped massive amounts of helicopter money into the economy. Abundant liquidity drove most asset prices, such as crypto and stocks, into a massive bull run since 2020. However, the resultant huge money supply expansion caused inflation to rise to a 40yr high. To combat the rapid inflation rise hurt consumer expenditures since salaries don’t rise in tandem with inflation, prompting Fed action. ...
