How are the Defi protocols handling the bear market?

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 had a negative impact in the current bear market.

While the 2022 recession has had its impact on many DeFi projects – and the cryptocurrency space in general – some continue to build.

Bear markets, while difficult for investors, can trigger revolutionary breakthroughs in the industry, and a new era of creativity seems inevitable if past events are any indication.

This leads to the question: which protocols will usher in DeFi’s next generation of technological advancement and which won’t?

The tale of the ant and the grasshopper can give some indications.

While the ants are busy storing food for the winter, the grasshopper is busy playing the violin and singing away the summer. Eventually, when winter comes, the grasshopper asks the ants for help because she is cold and hungry. Unfortunately, the ants don’t want to help him and tell him that she should have spent her time preparing for 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.

Likewise, many projects that fueled the euphoria that led to the current market downturn did not significantly advance the technology behind DeFi. They employed tokenomics with excessive leverage to focus on creating cash flows instead.

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

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

“Many DeFi project founders seem to be focusing on riding the hype train and doing more of what has already worked to make money fast. However, I believe what the space and its users actually need to thrive, regardless. from the market situation, it is more foresight and innovation from industry leaders. “

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While it is clear that some projects in space appear to be driven primarily by profit, some believe there are more sustainable founders.

Linh Han, CEO of Hectagon, a DAO-based investment platform, told Cointelegraph: “The pressure and characteristics of market strength predict a short-term payoff. In addition, it also forces the founders to compromise. However, the founders of Defi space is not shortsighted. In truth, no one who comes close to crypto space to build so early is shortsighted. “

How DeFi platforms performed during the bear market

Part of the DeFi industry, particularly the loan market, has shown its ability to withstand the ups and downs experienced by the industry at large. The aggregate amount of loans created shows that there is still substantial demand for these DeFi protocols.

Despite the current market conditions, DeFi lending platforms have continued to grow in user engagement. According to data from Defillama, the amount of money blocked in DeFi platforms has increased by more than 500% compared to 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 the network. This will help developers continue to build within DeFi, potentially bringing new platforms into space.

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

Building during a bear market allows platforms to acquire loyal users and lay the foundation for themselves before the next bull market. However, there were some downsides during this time as well.

For example, Terra’s blockchain ecosystem collapsed earlier this year, dropping more than 80% and leading to over $ 40 billion in losses for investors. During a previous 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 back to the point that some protocols are not prepared to deal with market downturns, especially when large coordinated sales are suspected to be one of the causes behind 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 hype-based projects slow or fail. Mullin agrees with this view, telling Cointelegraph:

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

Lucas Huang, co-founder of Aurigami, told Cointelegraph: “The market has always been cyclical in nature and, regardless of the circumstances, there will be opportunities to exploit. This slowdown in the market presents an opportunity for platforms to build, refine and innovate, all without the excitement and distractions of a bull market. ” Huang continued:

“Experienced investors will always find value regardless of market conditions and we view this bear market as simply a change in user behavior. Does the bear market have a negative effect on DeFi platforms? Obviously. But DeFi is dynamic enough to provide utility both in bull than in bear; the question is, what can you do to capitalize on it? ”

Projects that continue to grow during bear markets can also get long-term users who are more likely to stick around, instead of the good-weather investors that 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 the cryptocurrency winters. For example, Ethereum had its token sale in the 2014 bear market, while the Uniswap decentralized swap 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 occur during a bear market because the teams are deeply committed to developing breakthrough technologies. Standards are high during the bear market, so new ideas are tested under pressure and not kept alive by bull market liquidity. Innovation during a bear market is exactly how the Renaissance period came about. “

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

“Some of the best innovations in cryptocurrency occur in bear markets, but when you look behind the scenes, this shouldn’t come as a surprise. In a bull market, incentives are often skewed towards unsustainable business models. At the same time, those who do. they want to build something truly long-term they are more attracted to the relative calm and rationality that comes with the lack of excessive mainstream interest in cryptocurrencies. “