DeFi shows resilience during the market crises in March 2020 and May 2021
As if 2020 weren’t enough scary moments, 2021 is turning into a pretty exciting year for crypto. As the price of Bitcoin (BTC) hovers around the $ 35,000 mark, skeptics and social media experts are flocking to the streets to celebrate the long-awaited decline of the African economy. Of course, they completely forget that Bitcoin price has increased 533% since the third halving in May 2020.
Given the number of people claiming the crypto bubble has burst – including former US President Donald Trump – it’s almost hard to remember that just 12 months ago, Bitcoin was between $ 9,000 and $ 10,000. Dollar fluctuated.
In fact, since the halving, decentralized finance (DeFi) has emerged as the most promising sector of the crypto economy, driving the adoption of crypto space. A look at the growth statistics makes it clear how much momentum DeFi has created in the past year. As of June 2020, the Total Value Locked in DeFi (TVL) was around $ 1.05 billion. Today DeFi has more than $ 104 billion in banned logs.
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While DeFi will lead the crypto space going mainstream, DeFi has been challenged to the core for the past two years. While some viewers may point out obstacles in March 2020 and May 2021, the fact remains that DeFi is quite resilient and poised for further growth in the future.
Calm in the storm
Despite DeFi’s rapid growth, the space has undergone two major stress tests in the past two years: March 2020 and May 2021. It is clear that these circumstances have challenged the space. The global spread of the COVID-19 pandemic and the panic sell-off instigated by Elon Musk, together with crackdown on Chinese bitcoin miners, have resulted in a $ 1,000 billion loss in the entire cryptocurrency market.
While Musk’s Twitter account was partly responsible for evoking the storm, DeFi ensured a calming presence during the storm.
After Musk’s massive panic sell-off, something more telling and dramatic happened: nothing. DeFi logs continue to work exactly as planned: no crashes, no glitches. In fact, the DeFi sector will be worth over $ 100 billion – and will pass its stress test with flying colors.
This performance is particularly impressive when you factor in the stress test in March 2020. The total capitalization of the DeFi sector has plummeted – below $ 1 billion. Worse still, the frenzy culminated in a meltdown in MakerDAO’s liquidation system where the protocol was capitalized less and around $ 8 million worth of Ether (ETH) was auctioned off and bought for free for a period of 40 minutes.
However, like the rest of the DeFi room, MakerDAO still exists. While its existence requires auctioning native MKR tokens to settle bad debts, it can also weather the Black Thursday storm in March 2020.
Just 12 months later, DeFi is again putting on the cloak for accelerating the crypto space. Even prominent mainstream investor Mark Cuban would argue that DeFi “has changed the use of cryptocurrencies. There are many things you can do right now. If I had my Bitcoin, whether it went up or down in value, I could take a percent of it and borrow, lend and earn and be my own personal banker. “
CEX and DEX performance
The effects of the two crises mentioned above were also very different on centralized and decentralized exchanges (DEXs). While DEXs manage situations relatively efficiently, their centralized counterparts have seen significant outages and liquidation chaos.
The May 2021 crisis is extremely difficult for the Centralized Exchanges (CEX) as more than $ 7 billion in futures positions were liquidated in a single day, representing a one-day liquidation state. In addition, CEX users experience functional problems including preventing them from adding collateral, entering into loans, or entering into transactions.
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Decentralized exchanges, on the other hand, not only avoid downtime or downtime, but DEXs also have unprecedented trading volumes, according to Dune Analytics. However, that doesn’t mean there won’t be hiccups along the way. A record $ 700 million in DeFi logs was liquidated over a two-day period and users suffered from excessive gas prices. However, the logs work as planned and at no point present a connection problem for the user.
This alone underscores the robustness of DeFi compared to centralized platforms.
DeFi is the new secure asset fund for users
Perhaps the most important factor in DeFi’s resilience is the ability of crypto traders to make significant profits on tokens regardless of market volatility. DeFi protocols have grown in popularity over the past year as they reward traders with profits for their collateral and farming. In a broader sense, Profit Farming helps traders get maximum profits from their crypto assets by ingesting, lending and staking various DeFi protocols. This trading technique is very similar to dividend payment in the traditional banking system, where the profits are paid out to the traders helping them to double the profits.
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This strategy is vital in helping DeFi weather the 2020 and 2021 storms as traders continue to work within the DeFi protocols to generate an annualized percentage return, or APY, while disrupting volatility in the market.
The volatility we have experienced over the past 18 months has largely not stopped traders from investing in DeFi. In fact, the statistics show the opposite. While some speculators dusted their snowcoats in preparation for the crypto winter, DeFi Logs saw unprecedented monthly revenue – the TLV in DeFi Logs rose to nearly $ 8 billion.
The major economic stress tests in 2020 and 2021 are likely to disrupt earlier iterations of the decentralized economy. However, this mature, evolved version of the crypto world is much better prepared to weather the storm. Like influencer Logan Paul versus lightweight champion Floyd Mayweather, only survival is a big win. And similar to Paul, the DeFi room does a lot better than most people assume.
DeFi protocols not only survive, they thrive. The volatility in the free market is not where it came from two years ago. More notably, DeFi passed these tests – tests that centralized protocols struggle with.
DeFi’s resilience alone says a lot about its potential and stamina.
Doug Leonard is the CEO of Hifi, a fixed-rate, fixed-term credit protocol based on the Ethereum blockchain. Doug holds a BA in Business Information Systems from Brigham Young University and a Masters in Management Information Systems from Brigham Young University. Prior to being named CEO of HiFi Finance, Doug spent a year as a Senior Software Architect at Mainframe.