Monday, November 29, 2021


As if 2020 didn’t present sufficient nail-biting moments, 2021 is shaping as much as be fairly an fascinating yr for cryptocurrency. With the value of Bitcoin (BTC) floating across the $35,000 mark, skeptics and pundits are flocking to the streets of social media to have fun the long-awaited demise of the decentralized economic system. In fact, they fairly conveniently forgot that the value of Bitcoin has skilled a 533% enhance because the third halving happened in May 2020

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

For the reason that halving, actually, decentralized finance (DeFi) has emerged as probably the most promising sector of the cryptocurrency economic system, fueling the adoption of the crypto area. A fast look on the progress statistics clearly signifies simply how a lot momentum DeFi has generated over the previous yr. In June 2020, the overall worth locked (TVL) in DeFi was round $1.05 billion. As we speak, DeFi boasts greater than $104 billion locked-in protocols.

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

Though DeFi is ready to guide the crypto area into the mainstream, DeFi has been challenged to its core over the previous two years. Whereas some onlookers might point to the hurdles in March 2020 and Could 2021, the actual fact stays that DeFi is sort of resilient and is poised for additional progress shifting forward.

Calm within the storm

Regardless of the frenetic progress of DeFi, the area has skilled two substantial stress checks over the previous two years: March 2020 and Could 2021. To be clear, these cases challenged the DeFi area 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 within the loss of $1 trillion throughout the whole crypto market.

If the Twitter account of Musk is partially liable for summoning the storm, DeFi offered a relaxing 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 check with flying colours.

This feat is very spectacular when juxtaposed in opposition to the stress check administered in March 2020. The mixed capitalization of the DeFi sector took a tough nosedive — crashing under $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 at no cost over a 40-minute time interval.

Like the remainder of the DeFi area, nevertheless, MakerDAO survived. Though its survival required it to public sale off native MKR tokens to fill the dangerous debt, it was additionally capable of climate the storm of March 2020’s “Black Thursday.”

Simply 12 months later, DeFi would as soon as once more carry the mantle for the acceleration of the crypto area. Even famed mainstream investor Mark Cuban would go on to claim that with DeFi, cryptocurrency’s “utility has modified. There are such a lot of issues that you are able to do now. If I’ve received my Bitcoin, whether or not it goes up or down in worth, I can take a share of that and borrow and lend and earn revenue, and be my very own private banker.”

CEX and DEX efficiency

The impression of the 2 aforementioned crises was vastly completely different throughout centralized and decentralized exchanges (DEXs), as properly. Whereas DEXs navigated the conditions comparatively successfully, their centralized counterparts skilled outages and important liquidation chaos.

The Could 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. Moreover, CEX customers skilled performance points, together with prevention from including collateral, closing loans or finishing trades.

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

Decentralized exchanges, however, weren’t solely capable of keep away from outages or downtime, however DEXs additionally experienced unprecedented commerce quantity, based on Dune Analytics. Although, that’s not to say there have been no hiccups alongside the way in which. A document $700 million was liquidated in DeFi protocols over a two-day span, and customers suffered from egregious fuel costs. Nevertheless, 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 brand new safe asset fund for customers

Maybe crucial issue within the resilience of DeFi has been the power of crypto merchants to generate important returns on tokens, whatever the market volatility. DeFi protocols have grow to be more and more widespread over the previous yr, as they reward merchants with yield for his or her collateral and their farming. Extra broadly, yield farming helps traders generate maximum returns on their crypto property by borrowing, lending and staking throughout completely different DeFi protocols. The buying and selling method is sort of just like dividend funds within the conventional banking system, the place the yield paid out to merchants helps them generate compounded returns.

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

This methodology was instrumental in serving to DeFi climate the storms of 2020 and 2021, as merchants continued to function inside DeFi protocols to earn annual share 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. Whereas 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 economic system. This developed, matured model of the cryptosphere, nevertheless, was rather more ready to climate the storm. Akin to influencer Logan Paul squaring off in opposition to light-weight champion Floyd Mayweather, merely surviving is a large victory. And, just like Paul, the DeFi area 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 text doesn’t comprise funding recommendation or suggestions. Each funding and buying and selling transfer entails threat, and readers ought to conduct their very own analysis when making a choice.

The views, ideas and opinions expressed listed below are the creator’s alone and don’t essentially mirror or symbolize 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 data techniques from Brigham Younger College and a grasp’s diploma in administration data techniques from Brigham Younger College. Earlier than being named CEO of Hifi Finance, Doug spent a yr as a senior software program architect at Mainframe.