DeFi proved resilient during the March 2020 and May 2021 market crises


As if 2020 didn’t present sufficient nail-biting moments, 2021 is shaping as much as be fairly an attention-grabbing yr for cryptocurrency. With the worth of Bitcoin (BTC) floating round the $35,000 mark, skeptics and pundits are flocking to the streets of social media to have a good time the long-awaited demise of the decentralized financial system. Of course, they fairly conveniently forgot that the worth of Bitcoin has skilled a 533% improve since the third halving happened in May 2020

Given the variety of folks claiming the crypto bubble has burst — together with former U.S. President Donald Trump — it’s nearly laborious to keep in mind that the worth of Bitcoin was hovering between $9,000 and $10,000 a mere 12 months ago.

Since the halving, in reality, decentralized finance (DeFi) has emerged as the most promising sector of the cryptocurrency financial system, fueling the adoption of the crypto house. A fast look at the progress statistics clearly signifies simply how a lot momentum DeFi has generated over the previous yr. In June 2020, the complete worth locked (TVL) in DeFi was round $1.05 billion. Today, DeFi boasts greater than $104 billion locked-in protocols.

Related: Was 2020 a ‘DeFi year,’ and what is expected from the sector in 2021? Experts answer

Although DeFi is ready to guide the crypto house into the mainstream, DeFi has been challenged to its core over the previous two years. While some onlookers could point to the hurdles in March 2020 and May 2021, the truth stays that DeFi is sort of resilient and is poised for additional progress transferring forward.

Calm in the storm

Despite the frenetic progress of DeFi, the house has skilled two substantial stress checks over the previous two years: March 2020 and May 2021. To be clear, these situations challenged the DeFi house in methods it had not beforehand been challenged. The unfold of the global COVID-19 pandemic and the Elon Musk-provoked panic selloff, coupled with the crackdown on China’s Bitcoin miners, culminated in the loss of $1 trillion throughout the whole crypto market.

If the Twitter account of Musk is partially chargeable for summoning the storm, DeFi supplied a chilled presence inside the storm.

Following the huge panic selloff ignited by Musk, a much more telling and spectacular factor occurred: nothing. DeFi protocols continued to function precisely as designed: no crashes, no glitches. In truth, the DeFi sector would develop to surpass $100 billion in worth — passing its stress take a look at with flying colours.

This feat is very spectacular when juxtaposed towards the stress take a look at administered in March 2020. The mixed capitalization of the DeFi sector took a tough nosedive — crashing beneath $1 billion. Worse, the frenzy culminated in a crisis within MakerDAO’s liquidations system, the place the protocol grew to become under-capitalized, and roughly $8 million price of Ether (ETH) was bid on and bought free of charge over a 40-minute time interval.

Like the remainder of the DeFi house, nevertheless, MakerDAO survived. Although its survival required it to public sale off native MKR tokens to fill the unhealthy debt, it was additionally in a position to climate the storm of March 2020’s “Black Thursday.”

Just 12 months later, DeFi would as soon as once more carry the mantle for the acceleration of the crypto house. Even famed mainstream investor Mark Cuban would go on to claim that with DeFi, cryptocurrency’s “utility has changed. There are so many things that you can do now. If I’ve got my Bitcoin, whether it goes up or down in value, I can take a percentage of that and borrow and lend and earn income, and be my own personal banker.”

CEX and DEX efficiency

The affect of the two aforementioned crises was vastly totally different throughout centralized and decentralized exchanges (DEXs), as nicely. While DEXs navigated the conditions comparatively successfully, their centralized counterparts skilled outages and important liquidation chaos.

The May 2021 disaster was extraordinarily tough for centralized exchanges (CEXs), with greater than $7 billion in futures positions being liquidated in a single day, marking the second-highest single-day liquidation ever. Additionally, CEX customers skilled performance points, together with prevention from including collateral, closing loans or finishing trades.

Related: Decentralization vs. centralization: Where does the future lie? Experts answer

Decentralized exchanges, on the different hand, weren’t solely in a position to keep away from outages or downtime, however DEXs additionally experienced unprecedented commerce quantity, in accordance with Dune Analytics. Though, that isn’t to say there have been no hiccups alongside the means. A document $700 million was liquidated in DeFi protocols over a two-day span, and customers suffered from egregious fuel costs. However, the protocols operated as designed, and didn’t current compounding points to customers at any level.

This alone highlighted the robustness of DeFi in comparison with centralized platforms.

DeFi is the new safe asset fund for customers

Perhaps the most essential think about the resilience of DeFi has been the skill of crypto merchants to generate important returns on tokens, no matter the market volatility. DeFi protocols have grow to be more and more well-liked over the previous yr, as they reward merchants with yield for his or her collateral and their farming. More broadly, yield farming helps traders generate maximum returns on their crypto belongings by borrowing, lending and staking throughout totally different DeFi protocols. The buying and selling method is sort of just like dividend funds in the conventional banking system, the place the yield paid out to merchants helps them generate compounded returns.

Related: Yield farming is a fad, but DeFi promises to change the way we interact with money

This technique was instrumental in serving to DeFi climate the storms of 2020 and 2021, as merchants continued to function inside DeFi protocols to earn annual proportion yield, or APY, whereas concurrently circumventing the turbulence inside the market.

The volatility we’ve witnessed over the previous 18 months was largely unable to dissuade merchants from investing in DeFi. In truth, the statistics argue the opposite. While some speculators have been dusting off their snow coats in preparation for crypto winter, DeFi protocols experienced month-to-month all-time excessive revenues — pushing the TLV in DeFi protocols to almost $8 billion.

The huge financial stress checks of 2020 and 2021 had the potential to dismantle earlier iterations of the decentralized financial system. This developed, matured model of the cryptosphere, nevertheless, was way more ready to climate the storm. Akin to influencer Logan Paul squaring off towards light-weight champion Floyd Mayweather, merely surviving is a big victory. And, just like Paul, the DeFi house fared much better than most assumed.

Not solely did DeFi protocols survive, they thrived. The volatility inside the free market should not be the takeaway from the earlier two years. The extra telling prevalence is that DeFi handed these checks — checks that centralized protocols struggled with.

DeFi’s resilience alone speaks volumes about its potential and its endurance.

This article doesn’t include funding recommendation or suggestions. Every funding and buying and selling transfer entails danger, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed below are the creator’s alone and don’t essentially replicate or signify the views and opinions of Cointelegraph.

Doug Leonard is the CEO of Hifi, a fixed-rate, fixed-term lending protocol constructed on the Ethereum blockchain. Doug holds a BS in information programs from Brigham Young University and a grasp’s diploma in administration information programs from Brigham Young University. Before being named CEO of Hifi Finance, Doug spent a yr as a senior software program architect at Mainframe.