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


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As if 2020 weren’t enough nerve-wracking moments, 2021 is turning out to be a pretty interesting year for cryptocurrency. With the price of Bitcoin (BTC) hovering around the $ 35,000 mark, skeptics and experts flock to the streets of social media to celebrate the long-awaited demise of the decentralized economy. Of course, they conveniently forgot that Bitcoin’s price has risen 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 Bitcoin was priced between $ 9,000 and $ 10,000 just 12 months ago. Dollar fluctuated.

Since the halving, decentralized finance (DeFi) has actually emerged as the most promising sector of the cryptocurrency economy, driving the adoption of the crypto space. A quick look at the growth statistics clearly shows how much momentum DeFi has generated 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.

Connected: Was 2020 a “DeFi year” and what is expected of the industry in 2021? Experts answer

Although DeFi will take the crypto space mainstream, DeFi has been challenged to the core for the past two years. While some viewers may point out the hurdles in March 2020 and May 2021, the fact remains that DeFi is quite resilient and ready for further growth.

Calm in the storm

Despite DeFi’s rapid growth, the room has undergone two significant stress tests in the past two years: March 2020 and May 2021. To be clear, these cases have challenged the DeFi room in ways it had not previously challenged. The spread of the global COVID-19 pandemic and the panic selling provoked by Elon Musk, coupled with the crackdown on China’s bitcoin miners, culminated in a loss of $ 1 trillion in the entire crypto market.

If Musk’s Twitter account is partly responsible for summoning the storm, DeFi ensured a calming presence in the storm.

After the massive panic sell-off that Musk sparked, something far more meaningful and impressive happened: nothing. DeFi logs continued to work exactly as planned: no crashes, no glitches. In fact, the DeFi sector would be worth over $ 100 billion – and pass its stress test with flying colors.

That performance is particularly impressive when compared to the March 2020 stress test. The combined capitalization of the DeFi sector took a hard nosedive, breaking below $ 1 billion. Worse still, the frenzy culminated in a crisis in MakerDAO’s liquidation system that saw its protocol undercapitalized and about $ 8 million worth of Ether (ETH) being offered and purchased for free over a 40-minute period.

However, like the rest of the DeFi room, MakerDAO survived. Although it required its survival to auction local MKR tokens to fill the bad debt, it was also able to weather the “Black Thursday” storm in March 2020.

Just 12 months later, DeFi would again wear the cloak for accelerating the crypto space. Even famous mainstream investor Mark Cuban would argue that DeFi has changed the “usefulness of cryptocurrency”. There are so many things you can do right now. When I have my Bitcoin, whether it goes up or down in value, I can take a percentage of it and borrow and lend and generate income and be my own personal banker. “

CEX and DEX performance

The effects of the two crises mentioned above were also very different for centralized and decentralized exchanges (DEXs). While DEXs handled situations relatively effectively, their centralized counterparts experienced outages and significant liquidation chaos.

The May 2021 crisis was extremely difficult for centralized exchanges (CEXs) as more than $ 7 billion in futures positions were liquidated in a single day, making it the second highest single-day liquidation ever. Additionally, CEX users have experienced functionality issues including preventing collateral from being added, credit closing, or doing business.

Connected: Decentralization vs. centralization: where is the future? Experts answer

Decentralized exchanges, on the other hand, not only avoided outages or downtime, but DEXs also saw unprecedented trading volumes, according to Dune Analytics. However, that doesn’t mean there weren’t any problems along the way. A record $ 700 million was liquidated in DeFi logs over a two-day period and users suffered from outrageous gas prices. However, the logs worked as planned and never presented any problems to users.

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 has been the ability of crypto traders to generate significant returns on tokens regardless of market volatility. DeFi protocols have grown in popularity over the past year as they reward traders with returns for their collateral and farming. In a broader sense, yield farming helps traders get maximum returns on their crypto assets by borrowing, lending and staking loans across various DeFi protocols. The trading technique is pretty similar to dividend payments in the traditional banking system, where the return paid out to traders helps them achieve compound returns.

Connected: Yield farming is a fad, but DeFi promises to change the way we handle money

This method was instrumental in helping DeFi weather the 2020 and 2021 storms as traders continued to operate within the DeFi protocols to generate an annual percentage return (APY) while bypassing the turmoil in the market.

The volatility we have experienced over the past 18 months has largely failed to deter 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 posted high monthly revenues all time – raising the TLV in DeFi logs to nearly $ 8 billion.

The massive economic stress tests of 2020 and 2021 had the potential to destroy previous iterations of the decentralized economy. However, this evolved, mature version of the cryptosphere was much better prepared to weather the storm. Much like how influencer Logan Paul competes against lightweight champion Floyd Mayweather, just surviving is a big win. And similar to Paul, the DeFi room fared far better than most suspected.

DeFi protocols not only survived, they thrived. The volatility in the free market cannot be the result of the last two years. The more illuminating event is that DeFi passed these tests – tests that centralized protocols struggled with.

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

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk and readers should conduct their own research in making their decision.

The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.

Doug Leonard is the CEO of Hifi, a fixed-rate, fixed-term credit protocol based on the Ethereum blockchain. Doug holds a BS 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.