The total capital locked in decentralized finance (DeFi) protocols has reached an impressive $170 billion, marking a significant milestone for the sector. This rebound comes as the industry has fully recovered from the losses incurred during the 2022 collapse of the Terra/LUNA ecosystem and the subsequent bear market.
Ethereum remains the dominant player, holding approximately 59% of the capital. However, emerging platforms like the Coinbase-backed layer 2 network Base, HyperLiquid’s layer 1 blockchain, and the Sui network are beginning to erode Ethereum’s market share. Collectively, these newer protocols have attracted over $10 billion in total value locked (TVL), amounting to about 6% of the market.
Recent investor trends have shown a shift in focus within the DeFi landscape. There has been a noticeable movement of institutional capital towards ether, resulting in outflows from traditional liquid staking products, such as Lido. Instead, institutional players are opting for products like Figment for staking. Alongside these trends, the popularity of Solana and the BNB Chain is rising, largely fueled by an upsurge in memecoin trading. Solana has now secured its position as the second-largest blockchain in the DeFi space, boasting a TVL of $14.4 billion, with BNB Chain following at $8.2 billion.
The growth of the DeFi sector has been markedly different from the explosive boom experienced during the prior bull market from January 2021 to April 2022 when TVL surged from $16 billion to a staggering $202 billion in just over a year. In contrast, the current cycle has shown a more tempered growth, increasing from $42 billion in October 2022 to its current figure of $170 billion in September 2025. This gradual rise suggests that investors are becoming increasingly cautious, learning from the challenges of 2022 and fostering a more mature ecosystem for lending, borrowing, and yield generation.
The collapse of the Terra ecosystem wiped $100 billion off the DeFi market nearly instantaneously. This fallout affected a wide array of participants, including the now-defunct hedge fund Three Arrows Capital, which had heavily invested in an algorithmic stablecoin that ultimately failed, leading to widespread contagion in the industry. This scenario has been characterized as a “dividend trap,” where yields that appeared too good to be true were unsustainable in reality.
Current yields are significantly lower than those seen during the height of the Terra crisis. For example, lending protocol Aave currently offers a 5.2% yield on stablecoins, while Ether.fi’s restaking protocol offers 11.1%, both of which are markedly less than the 20% yields offered by Terra’s stablecoin.
Looking ahead, the DeFi sector now finds itself in a position reminiscent of pre-Terra conditions but with more realistic and sustainable yields. Nonetheless, questions arise about how the market can continue its growth to surpass the record TVL levels set in 2021. The answer is complex. While institutional investments into assets such as ether and Solana are expected to maintain a bullish outlook, the industry remains troubled by recurring issues of hacks, scams, and rug pulls, particularly related to memecoins.
Reports indicate that crypto investors lost around $2.5 billion to such malicious activities in the first half of 2025. For DeFi to truly become a viable alternative to traditional financial systems, investor protection must be prioritized. Unlike traditional finance, where deposits may be insured, the decentralized nature of cryptocurrencies leaves users largely unprotected; if they lose their private keys or fall victim to hacks, there is no customer service to consult.
Looking forward, the evolution of DeFi—whether in this cycle or the next—will necessitate a critical focus on security and prevention measures against hacks. The industry remains perilously close to another potential crisis, and the lessons learned from past failures will likely shape the future landscape of decentralized finance.
