Layer 1 blockchain Sonic, formerly known as Fantom, is grappling with a steep drop in total value locked (TVL) across its ecosystem, raising questions about the sustainability of its growth strategy.
Sonic’s TVL has fallen from $1.1 billion in May to $367 million as of today, a decline of roughly 67%, according to DeFiLlama. For context, Fantom had previously reached a TVL high of around $9 billion in early 2022.
Sonic TVL
The drop coincided with the end of Sonic’s 5-year deal with market maker Wintermute, underscoring how hard it can be for new blockchains to keep users and funds active on their networks. At the time, Sonic’s Chief Strategy Officer wrote on X: “This is what we need for our ecosystem projects to thrive. Cex only support is simply no longer enough.”
Sonic CEO Michael Kong said in comments shared with The Defiant that while TVL is an important metric, “it doesn’t always tell the whole story.” He added that Sonic aims to achieve the same TVL as Fantom once had.
“Given crypto’s volatile nature, it is only natural that TVLs fluctuate over time,” Kong said. “We are also laser-focused on building institutional scale, with plans to create a U.S. ETF and a Nasdaq [digital asset treasury].”
Earlier this month, Sonic passed a proposal to form Sonic USA, which will deploy $150 million worth of S tokens to fund an ETF and DAT.
‘Double-edged sword’
Other experts, however, say the network faces strategic choices. “Sonic TVL has dropped almost 70% since May, largely due to them ending their market-making agreement with Wintermute,” said Mike Maloney, CEO and founder of Incyt. “New [Layer 1s] looking to serve DeFi can’t compete with Ethereum (and Solana’s) organic volume, and need to bring the ‘edge’ of private market makers.”
Ethereum is currently the world’s largest blockchain by TVL in decentralized finance (DeFi), with nearly $110 billion currently deposited across Ethereum-based protocols, according to DefiLlama. Meanwhile, Solana boasts a TVL of $14 billion.
Maloney called it a “double-edged sword,” noting that while market makers bring increased volume and tighter spreads, they also capture fees that would otherwise go to users and “remove large swathes of liquidity and transaction volume after their term has ended.”
“Sonic is now at a crossroads and must make a difficult choice: rely upon professional market makers to create an efficient market, or suffer through the woes of long-tail adoption to create something truly decentralized,” Maloney concluded.
‘Yield-seekers are mercenaries’
Meanwhile, Brian Huang, co-founder and CEO of Glider, highlighted the challenge of relying on yield-driven capital.
“Yield-seekers are mercenaries. We’ve seen this time and time again, where a new chain (although Sonic was a rebrand) launches with heavy incentives, but fails to maintain any of that TVL when the incentives run out. When the incentives are gone, the yield-seekers move capital to the next chain/opportunity,” Huang said.
He noted that Sonic’s TVL changes are closely aligned with the price of its native token, $S, which is currently trading at $0.30, down approximately 69% from its launch price of $0.98 earlier this year, according to The Defiant’s price page.
“Sonic was paying out incentives with the $S token – for example, earn an additional 10% APY in $S on deposits,” Huang explained. “However, as the price of $S drops, that 10% APY starts to look more like 5% APY and then 2% APY.”
He noted that this makes returns no longer appealing. At the same time, people receiving $S rewards are selling them, which pushes the token’s price down even further.
“TVL is only useful if you have borrowers that can generate yield for lenders,” Huang said. “We’ll have to see if Sonic can stimulate more borrowing in its ecosystem rather than just relying on ephemeral incentives.”
