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Despite cooling DeFi hype, the total value locked in these financial protocols continues to make new all-time highs.

State of Top DeFi Projects

The dominant DeFi projects in the space are Uniswap, Maker, and WBTC. The decentralized finance ecosystem is much different from the bull market which ended in September.

Lending platforms and yield aggregators like Compound, Aave, yEarn Finance, and Curve topped the list at the beginning of the DeFi boom. The shift can be correlated to artificially high returns on these platforms.

The annual returns on yEarn is a robust indicator of DeFi liquidity provider returns in the niche. Annual stablecoin returns on yEarn are in the range of 6-7%. Curve and yEarn Finance pools are yielding around 10-14%. The returns for Ethereum and Bitcoin-based pools are about 1%.

These yields are in line with traditional centralized lenders and borrowers. Crypto.com offers as much as 14% yield on stablecoins, while Celsius provides as much as 15% APY. Bitcoin and Ethereum yield around 3-8%.

Accounting for Risk in Decentralized Finance

There is one notable difference. The DeFi ecosystem comes with much greater risk. Even with on-par interest rates, when accounting for risk the decentralized finance ecosystem is underperforming in terms of yield, especially on Bitcoin and Ethereum.

One such risk is centralization and capture by a small number of users. On Curve, for example, three Ethereum addresses provide 48% of the total liquidity on the protocol.

In the sixth position on DeFi Pulse, Harvest Finance, with $1 billion-plus liquidity, also raises concerns. An anonymous Ethereum address for Harvest Finance holds the controls to the smart contract, giving them power over the contract’s liquidity provider tokens and even Ethereum balances.

Meanwhile, Uniswap’s liquidity is under threat in the coming weeks as liquidity mining rewards expire on Nov. 17.

Prices also reflect lower confidence in DeFi. Governance tokens are down significantly since September. YFI, COMP, and CRV have plunged between 60-80%, while MKR and UNI dropped 15% over the same period.

DeFi prices have been less volatile in October, suggesting consolidation of this year’s gains. Nonetheless, given the DeFi craze’s cooldown and substantial risks that come with exposure to decentralized finance, the possibility of another leg down is still significant.