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 negative impacts from the current bear market.
While the 2022 downturn has taken its toll, many DeFi projects — and the cryptocurrency space in general — are continuing to build some.
While bear markets are difficult for investors, they can spark game-changing industry breakthroughs, and a new era of creativity seems inevitable if past events suggest it is.
This leads to 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 provide some clues.
While the ants are busy storing food for the winter, the grasshopper is busy playing its violin and singing the summer. Finally, when winter comes, the grasshopper goes 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 the winter instead of wasting it on other things, so now he’s on his own.
The moral of the story is that it pays to use your time diligently to prepare for the future.
Similarly, many projects that have fueled the euphoria that has led to the current market downturn have not significantly advanced DeFi’s underlying technology. They used overly leveraged tokenomics to instead focus on cash flow generation.
So it seems reasonable to think that protocols focused on hype and profit are the most likely to fail during a bear market, while projects 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 compliant digital securities, told Cointelegraph:
“Many DeFi project founders seem to be focused on riding the hype train and doing more of what was already working to make a quick buck. However, I believe that what the space and its occupants really need to thrive regardless of the market situation is more foresight and innovation from 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 sustainable-minded founders out there.
Linh Han, CEO of Hectagon, a DAO-based investment platform, told Cointelegraph, “The pressure and characteristics of the market power project to generate near-term profits. In addition, founders also have to make more compromises. Founders in Defi Space are not short-sighted. Truly, no one coming into the crypto space to build so early is short-sighted.”
How DeFi platforms performed during the bear market
Part of the DeFi sector, particularly the credit market, has proven its ability to weather the ups and downs of the industry as a whole. The total amount of credit created shows that there is still significant demand for these DeFi protocols.
Additionally, Aurora, an Ethereum Virtual Machine compatible near protocol network, has raised a $90 million fund to support DeFi apps on the network. This will help developers continue building within DeFi and potentially bring new platforms into the space.
Aurigami, a liquidity and credit protocol on Aurora, raised $12 million to help them grow their platform during the current market conditions. The platform currently has the highest TVL on Aurora, and they performed risk analysis and worst case scenario simulation for the protocol.
Building during a bear market allows platforms to attract loyal users and lay a foundation for themselves ahead of the next bull market. However, there were also some negatives during this time.
For example, the Terra blockchain ecosystem collapsed earlier this year, plummeting over 80% and resulting in over $40 billion in investor losses. During a previous interview with Cointelegraph, Mike McGlone, a senior commodities strategist at Bloomberg, said that Terra’s collapse is part of a natural purge of the crypto space that occurs in every bear market.
This leads back to the point that some protocols are unprepared to deal with market downturns, particularly when large, coordinated sell-offs are one of the causes for Terra Classic (LUNC) – formerly Terra (LUNA) – and its stablecoin TerraUSD (USTC ) to collapse.
The bear market is an opportunity
Bear markets can help legitimate projects that keep building and innovating stand out, while projects based on hype slow down or fail. Mullin agrees with this view, telling Cointelegraph:
“Bear markets tend to weed out the weaker projects and founders looking for a quick buck. If projects are to not only survive but thrive during the bear market, they have no other options than to innovate and create real value for the space and surrounding 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 and innovate — all without the excitement and distractions of a bull market.” Huang continued :
“Savvy investors will always find value regardless of market conditions, and we see this bear market simply as a shift in user behavior. Is the bear market having a negative impact on DeFi platforms? Naturally. But DeFi is dynamic enough to offer utility in both bulls and bears; the question is, what can you do to capitalize on it?
Projects that continue to build during bear markets can also attract long-term users who are more likely to stay than the fair-weather 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 emerged from crypto winters. For example, Ethereum had its token sale in the 2014 bear market, while Uniswap decentralized swap platform was deployed 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 go head-deep into developing disruptive technologies. During the bear market, standards are high, so new ideas are tested under pressure rather than being kept alive by the liquidity of the bull market. Innovation during a bear market is just the thing as 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 as “the excessive noise of unsustainable business models is silenced and gives everyone the opportunity ( and the need to focus on what matters in the long run.”
“Some of the best crypto innovations happen in bear markets, but if you look behind the scenes, this shouldn’t come as a surprise. In a bull market, incentives are often skewed into unsustainable business models. At the same time, those looking to build something truly long-term are more likely to be drawn to the relative calm and rationality that accompanies a lack of overly mainstream interest in crypto.