Decentralized Finance has crossed $1 billion “total value locked” (TVL) and is approaching new all time highs thanks to the likes of WBTC and Aave, two networks that have seen tens of millions added to their portfolios in recent weeks. However, this milestone – which has been crossed once before – has come about largely from assets other than ETH, with Ether’s use as collateral trending downwards since March 12th and reaching a level not seen since November 2019.

This trend may come as a surprise to many, as historically the price of ETH has shared a distinct relationship with total ETH leveraged in DeFi. The logic being that as market sentiment turns bullish, ETH is used in DeFi to leverage a user’s position in anticipation – or in line with – a price rally and vice versa. However, the opposite has been observed since March 12th, when the sharp recovery of ETH’s price had no positive bearing on the total ETH leveraged in DeFi.

This is particularly striking as the cost of leveraging ETH in the DeFi’s largest protocol, Maker, was recently set to 0.00%, a rate that would have – under previous circumstances – sent this chart tearing upwards.

This break in the trend could be explained by a number of reasons:

• DeFi users did not anticipate a v-shape recovery and chose not to leverage ETH.
• DeFi smart contracts were deemed too insecure when considering risk/reward.
• ETH taken out of DeFi during the crash is now being set aside ahead of ETH 2’s Phase 0.
• ETH has indeed been leveraged, but off-chain and in closed systems where the data is not readily available.

Regardless, the decreasing use of ETH in DeFi may raise some concerns; after all, one of the more recent and powerful investment cases for Ethereum has been the token’s utility as collateral in these new protocols.

If this trend continues downwards, it is indeed concerning. ETH is the protocol’s most trusted asset, arguably making it the most well-suited form of collateral in these networks. A sustained decline in the use of ETH would suggest that users aren’t all that bothered about trustless assets, instead willing to sacrifice trust for other properties; be it the price stability of USDC and DAI or the “store of value” nature of Bitcoin in WBTC.

However, if you believe – as I do – that investors, users and DeFi protocols do indeed value ETH’s trustless nature above all else, and that this current pattern is a short-term deviation from a long-term trend, then this chart would seem set for a major correction.

When and if the trend does correct, it could well indicate the beginnings of yet another major rally in the price of ETH. One to keep an eye on.