As if 2020 didn’t present sufficient nail-biting moments, 2021 is shaping as much as be fairly an fascinating 12 months for cryptocurrency. With the worth of Bitcoin (BTC) floating across 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. In fact, they fairly conveniently forgot that the worth of Bitcoin has skilled a 533% improve because the third halving occurred in Could 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 do not forget that the worth of Bitcoin was hovering between $9,000 and $10,000 a mere 12 months in the past.
Because the halving, in truth, decentralized finance (DeFi) has emerged as essentially the most promising sector of the cryptocurrency financial system, fueling the adoption of the crypto house. A fast look on the development statistics clearly signifies simply how a lot momentum DeFi has generated over the previous 12 months. In June 2020, the entire worth locked (TVL) in DeFi was round $1.05 billion. As we speak, DeFi boasts greater than $104 billion locked-in protocols.
Though DeFi is about to steer the crypto house into the mainstream, DeFi has been challenged to its core over the previous two years. Whereas some onlookers could level to the hurdles in March 2020 and Could 2021, the actual fact stays that DeFi is kind of resilient and is poised for additional development shifting forward.
Calm within the storm
Regardless of the frenetic development of DeFi, the house has skilled two substantial stress exams over the previous two years: March 2020 and Could 2021. To be clear, these cases challenged the DeFi house in methods it had not beforehand been challenged. The unfold of the international 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 all the crypto market.
If the Twitter account of Musk is partially answerable for summoning the storm, DeFi offered a chilled presence inside the storm.
Following the large 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 reality, the DeFi sector would develop to surpass $100 billion in worth — passing its stress take a look at with flying colours.
This feat is particularly spectacular when juxtaposed in opposition to 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 disaster inside 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 house, nonetheless, MakerDAO survived. Though 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.”
Simply 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 declare 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 obtained my Bitcoin, whether or not it goes up or down in worth, I can take a proportion of that and borrow and lend and earn earnings, and be my very own private banker.”
CEX and DEX efficiency
The influence 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.
Decentralized exchanges, then again, weren’t solely in a position to keep away from outages or downtime, however DEXs additionally skilled unprecedented commerce quantity, in keeping with Dune Analytics. Although, that’s not to say there have been no hiccups alongside the way in which. A file $700 million was liquidated in DeFi protocols over a two-day span, and customers suffered from egregious gasoline costs. Nonetheless, the protocols operated as designed, and didn’t current compounding points to customers at any level.
This alone highlighted the robustness of DeFi compared with centralized platforms.
DeFi is the brand new safe asset fund for customers
Maybe an important 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 turn out to be more and more widespread over the previous 12 months, as they reward merchants with yield for his or her collateral and their farming. Extra broadly, yield farming helps merchants generate most returns on their crypto property by borrowing, lending and staking throughout completely different DeFi protocols. The buying and selling method is kind of much like dividend funds within the conventional banking system, the place the yield paid out to merchants helps them generate compounded returns.
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 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 reality, the statistics argue the opposite. Whereas some speculators had been dusting off their snow coats in preparation for crypto winter, DeFi protocols skilled month-to-month all-time excessive revenues — pushing the TLV in DeFi protocols to almost $8 billion.
The large financial stress exams of 2020 and 2021 had the potential to dismantle earlier iterations of the decentralized financial system. This advanced, matured model of the cryptosphere, nonetheless, 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, much 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 incidence is that DeFi handed these exams — exams that centralized protocols struggled with.
DeFi’s resilience alone speaks volumes about its potential and its endurance.
This text doesn’t include funding recommendation or suggestions. Each funding and buying and selling transfer entails danger, 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 characterize 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 12 months as a senior software program architect at Mainframe.