A sharp drop in TVL and DApp usage preceded Avalanche’s (AVAX) 16% correction

After an impressive 73% rally between July 13 and August 13, Avalanche (AVAX) has faced a 16% rejection from the $30.30 resistance level. Some analysts will try to frame the correction as a “technical adjustment,” but the network’s deposits and decentralized applications reflect deteriorating conditions.

Avalanche (AVAX) index, USD. Source: TradingView

To date, Avalanche remains 83% below its November 2021 high of $148. More data than technical analysis can be analyzed to explain the 16% price drop, so let’s take a look at the network’s usage in terms of deposits and users.

The decentralized application platform (DApp) remains a top-15 contender with a market value of $7.2 billion. Meanwhile, Solana (SOL), another proof-of-work (PoW) layer-1 platform, has a market cap of $14.2 billion, which is almost double that of Avalanches.

Avalanche’s TVL dropped 40% in two months

Some analysts tend to overemphasize the total value locked (TVL) metric, and while this may be relevant to the decentralized finance (DeFi) industry, it is rarely necessary for the minting of non-fungible tokens (NFT), marketplaces for digital goods, crypto games, gambling and social applications.

Using layer-2 solution Polygon (MATIC) as a proxy, it currently has a TVL of $2.2 billion while the market cap of MATIC is $7.2 billion; thus a 3.3x MCap/TVL ratio. Oddly enough, the same ratio applies to the Avalanche, which currently has a similar $2.2 billion TVL and $7.2 billion capitalization.

Avalanche Total Value Locked, AVAX. Source: DefiLlama

Avalanche’s primary DApp metric began showing weakness in late July after TVL fell below 110 million AVAX. In two months, today’s 85.4 million is a sharp 40% cut and signals that investors have been extracting coins from the network’s smart contract applications.

The chart above shows how Avalanche’s smart contract deposits peaked at 175 million AVAX on June 13th, followed by a constant decline. In dollar terms, today’s TVL of $2.2 billion is the lowest figure since September 2021. This figure represents 8.2% of the total TVL (excluding Ethereum), according to data from DefiLlama.

Initially, the data seems disappointing, especially considering Solana’s network TVL decreased by 27% in the same period in SOL terms, and Ethereum’s TVL fell by 33% in ETH deposits.

DApp usage has also underperformed competing chains

To confirm whether the TVL drop in Avalanche is troublesome, one should analyze a few DApp usage metrics.

Avalanche DApps 30-day on-chain data. Source: DappRadar

As shown by DappRadar, on August 18, the number of Avalanche network addresses interacting with decentralized applications decreased by 5% compared to the previous month. In comparison, Ethereum had a 4% increase and Polygon users gained 10%.

Avalanche’s TVL has been the hardest hit compared to similar smart contract platforms, with the number of active addresses interacting with most DApps exceeding 20,000 in just one instance. This data should be a warning signal to investors betting on this automated blockchain solution.

Polygon, on the other hand, collected 12 decentralized applications with 20,000 or more active addresses in the same time period. The findings above suggest that Avalanche is losing ground to competing chains, and this adds another reason for the recent 16% drop.

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