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Decentralized finance (DeFi) is one of the fastest growing sectors in the crypto space since its inception in 2018. However, like many other sectors, DeFi is having a negative impact on the current bear market.
The 2022 recession has hit many DeFi projects (and the cryptocurrency space in general), but some are still building.
Bear markets are difficult for investors, but they can also trigger game-changing breakthroughs in the industry, and if past events are any indication, a new era of creativity seems inevitable.
This leads to the question of which protocols will bring DeFi’s next generation of technological advancements and which ones will not.
The fable of the ant and the grasshopper might give you a hint.
While ants are busy stockpiling food for the winter, grasshoppers spend the summer playing the violin and singing. Finally, when winter comes, the grasshopper is cold and hungry, so she goes to the ants for help. Unfortunately, Ali doesn’t want to help him and tell him that he should have spent his time getting ready for winter instead of spending his time doing something else, so he’s alone now.
The moral of the story is that it pays to use your time diligently to prepare for the future.
Similarly, many of the projects that fueled the euphoria that led to the current market downturn did not significantly advance the underlying technology of DeFi. They adopted over-leveraged tokenomics and focused instead on generating cash flow.
Therefore, it is reasonable to assume that protocols focused on hype and profits are most likely to fail during bear markets, while projects focused on creating real user value are likely to survive. It seems to be
John Patrick Mullin, co-founder of SOMA.finance, a decentralized marketplace for digital assets and compliant digital securities, told Cointelegraph:
Many founders of DeFi projects seem to be on the hype train and focused on doing more of what is already working to make quick money. We believe that spaces and their users need to actually thrive, rather than just vision and innovation by industry leaders.
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While it’s clear that some projects in this space appear to be primarily profit-driven, some believe there are more founders who value sustainability.
Linh Han, CEO of DAO-based investment platform Hectagon, told Cointelegraph: The universe is not short-sighted. Really, no one coming to crypto space to build this early is short-sighted.
Parts of the DeFi sector, especially the lending market, have shown their ability to weather the ups and downs experienced by the industry as a whole. The total amount of loans made shows that there is still considerable demand for these his DeFi protocols.
Despite the current market conditions, DeFi lending platforms continued to grow in user engagement. Data from Defillama shows that the amount of money locked in DeFi platforms has increased by more than 500% since last year.
Additionally, Aurora, an Ethereum Virtual Machine compatible network on the Near Protocol, has launched a $90 million fund to support DeFi apps on its network. This will allow developers to continue building within her DeFi and potentially introduce new platforms into the space.
Aurora’s liquidity and lending protocol, Aurigami, has raised $12 million to help build its platform in the current market conditions. The platform currently has the best he TVL on Aurora, conducting risk analysis and worst-case scenario simulations for the protocol.
By building during a bear market, the platform can gain loyal users and lay a foundation before the next bull market. However, there were some downsides to this period as well.
For example, the Terra blockchain ecosystem collapsed earlier this year, dropping over 80% and costing investors over $40 billion. In a previous interview with Cointelegraph, Bloomberg Senior Commodity Strategist Mike McGlone said the Terra collapse was part of the crypto space’s natural purge that occurs in every bear market.
This goes back to the point that some protocols are not prepared to deal with market downturns. In particular, the collapse of Terra Classic (LUNC) formerly Terra (LUNA) and its stablecoin TerraUSD (USTC).
A bear market helps highlight legitimate projects that continue to build and innovate, while hype-based projects slow down or fail. Mullin agrees with this view, telling Cointelegraph:
A bear market tends to weed out weak projects and founders looking for quick profits. For projects to not only survive but thrive in a bear market, they need to innovate and grow in the space and in that space. We have no choice but to create real value: the community.”
Aurigami co-founder Lucas Huang told Cointelegraph: , and innovation without the excitement and distractions of a bull market. Mr. Huang continued:
Savvy investors always find value regardless of market conditions. We see this bear market simply as a shift in user behavior. Will a bear market negatively impact DeFi platforms? Bullish or bearish, the question is what can be done to take advantage of it.
Projects that continue to build during bear markets can also acquire long-term users who are likely to stay longer instead of sunny investors who only show up during bull markets.
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A bear market is a great opportunity for new technologies to enter the crypto space. In fact, the crypto winter has spawned some great innovations. For example, Ethereum had a token sale during his 2014 bear market, while the 2018 bear market saw decentralized swap platform Uniswap deployed on Ethereum.
Mirana Valmont, founder and CEO of KIRA, a decentralized network for hosting DeFi applications, told Cointelegraph:
The best innovations occur during bear markets because teams are deeply committed to developing game-changing technology. During bear markets, standards are high, new ideas are tested under pressure, and bull Not sustained by market liquidity, innovation during bear markets is exactly how the Renaissance came about.
Vid Gradiar, CEO of social and educational cryptocurrency platform NewsCrypto.io, told Cointelegrpah that bear markets are like a self-care routine for the crypto industry. Give everyone the opportunity (and the need) to focus on what matters in the long term.
Some of the best innovation in crypto happens in bear markets, and this is not surprising when you look behind the scenes. In bull markets, incentives are often skewed toward unsustainable business models. At the same time, those who want to build something truly long-term are drawn to the relative calmness and rationality that accompanies the lack of undue mainstream interest in cryptocurrencies.
