How Do Defi Protocols Handle the Bear Market?

How Do Defi Protocols Handle the Bear Market?

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Decentralized finance (DeFi) has been one of the fastest growing sectors in the crypto space since its emergence in 2018. However, like many other sectors, DeFi has seen a negative impact in the current bear market.

While the 2022 recession has taken its toll on many DeFi projects, and the cryptocurrency space in general, some continue to develop.

Bear markets, while difficult for investors, can spark game-changing advances in the industry, and a new era of creativity seems inevitable if past events are any indication.

This begs the question: Which protocols will usher in the next generation of DeFi technological advances and which will not?

The fable of the ant and the grasshopper may give some indication.

While the ants are busy storing food for the winter, the grasshopper is busy playing his violin and singing to get through the summer. Finally, when winter comes, the grasshopper turns to the ants for help because it is cold and hungry. Unfortunately, the ants don’t want to help him and tell him that he should have spent his time preparing for winter instead of wasting it on other things, so he is now alone.

The moral of the story is that it pays to make diligent use of the tenses to prepare for the future.

Similarly, many projects that fueled the euphoria that led to the current market downturn did not make significant progress on the underlying DeFi technology. Instead, they employed overleveraged tokenomics to focus on creating cash flow.

So it seems reasonable to think that protocols focused on hype and profit are more likely to fail during a bear market, while projects that are focused on creating real user value are more likely to survive.

John Patrick Mullin, co-founder of SOMA.finance, a decentralized marketplace for digital assets and supported digital securities, told Cointelegraph:

“A lot of DeFi project founders seem focused on jumping on the hype bandwagon and doing more of what has already worked to make a quick buck. However, I think what the space and its users really need to thrive, regardless of the situation market, it’s more foresight and innovation from industry leaders.

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While it’s clear that some projects in the space appear to be primarily profit-driven, some believe there are founders with a more sustainable mindset.

Linh Han, CEO of Hectagon, a DAO-based investment platform, told Cointelegraph: “The pressure and characteristics of the market force project to achieve a short profit. In addition, it also makes the founders have to commit more. However, However, founders in the Defi space are not myopic. In truth, no one coming into the crypto space to build this early is myopic.”

How DeFi platforms have behaved during the bear market

A part of the DeFi sector, most notably the lending market, has shown its ability to weather the ups and downs experienced by the industry as a whole. The aggregate amount of loans created demonstrates that there is still substantial demand for these DeFi protocols.

Despite current market conditions, DeFi lending platforms continued to grow in user engagement. According to data from Defillama, the amount of money locked on DeFi platforms has increased by more than 500% since last year.

Additionally, Aurora, an Ethereum Virtual Machine-compatible network on the Near Protocol, launched a $90 million fund to support DeFi applications on the network. This will help developers continue to build within DeFi, potentially bringing new platforms into the space.

Aurigami, a liquidity and lending protocol in Aurora, raised $12 million to help them build their platform during current market conditions. The platform currently has the highest TVL in Aurora, and they performed a risk analysis and worst-case simulation for the protocol.

Building during a bear market allows platforms to gain loyal users and establish a foundation for themselves before the next bull market. However, there have also been some negative aspects during this period.

For example, the Terra blockchain ecosystem crashed earlier this year, dropping more than 80% and causing more than $40 billion in losses to investors. During an earlier interview with Cointelegraph, Mike McGlone, a senior commodity strategist at Bloomberg, said that the collapse of Terra was part of a natural purge in the crypto space that occurs in every bear market.

This brings us back to the point that some protocols are not prepared to deal with market downturns, especially when large coordinated liquidations are suspected to be one of the causes behind Terra Classic (LUNC), formerly Terra (LUNA). , and its stablecoin TerraUSD (USTC) collapsing.

The bear market is an opportunity

Bear markets can help legitimate projects that continue to build and innovate stand out, while projects based on hype slow down or fail. Mullin agrees with this point of view, telling Cointelegraph:

“Bear markets tend to weed out weaker projects and founders looking for a quick buck. If projects are to not only survive but thrive during a bear market, they have no other options but to innovate and create real value for the space and its community.” .”

Lucas Huang, co-founder of Aurigami, told Cointelegraph: “The market has always been cyclical in nature and no matter the circumstances, there will be opportunities to capitalize. This market downturn serves as an opportunity for platforms to build, refine and innovate, all without the excitement and distractions of a bull market. Huang continued:

“Savvy investors will always find value no matter what the market conditions are, and we see this bear market simply as a change in user behavior. Does the bear market have a negative effect on DeFi platforms? Of course. But DeFi is bad enough. dynamic enough to provide utility both on the upside and downside; the question is, what can you do to capitalize on it?”

Projects that continue to develop during bear markets can also gain long-term users who are more likely to stick around, rather than fair-time investors who only show up during bull markets.

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The bear market is a great time for new technologies to enter the crypto space. In fact, some great innovations have come out of crypto winters. For example, Ethereum had its token sale in the 2014 bear market, while the Uniswap decentralized exchange platform was implemented on Ethereum in the 2018 bear market.

Milana Valmont, founder and CEO of KIRA, a decentralized network for hosting DeFi applications, told Cointelegraph:

“The best innovations happen during a bear market because teams are headfirst into developing breakthrough technology. Standards are high during a bear market, so new ideas are tested under pressure and not kept alive by liquidity.” of the bull market. Innovation during a bear market is exactly how the renaissance period came to fruition.”

Vid Gradišar, CEO of NewsCrypto.io, a social and educational crypto platform, told Cointelegrpah that the bear market is like a “self-care routine” for the cryptocurrency space, in which “excessive noise from unsustainable business models is muted, giving everyone the opportunity (and the need) to focus on what counts in the long run.”

“Some of the best innovation in crypto happens in bear markets, but when you look behind the scenes, this shouldn’t surprise you. In a bull market, the incentives are often skewed toward unsustainable business models. At the same time, those who want to build something truly in the long run they are more attracted to the relative calm and rationality that comes with a lack of excessive widespread interest in cryptocurrencies.”