Chicken Little might as well have been a HODLer when he uttered the famous “The sky is falling” line, with Bitcoin down around 70% from its all-time high of $68,672 and the overall crypto market, which once had a combined valuation of around $3 trillion, now down to $1 trillion.
While crypto tries to halt its free fall and its critics and skeptics rejoice in the misfortunes of many people who have lost their life savings, the elephant in the room is crypto’s long-term viability as an investment. The smaller, but perhaps more important, elephant is which direction decentralized finance (DeFi) will take once the bear market purges the weak and fraudulent projects from the industry.
To understand this, it is important to analyze and understand the current state of both the crypto and non-crypto markets now.
From bull to bear
From the explosion of NFTs (non-fungible tokens) to blockchain games garnering outrageous ratings, we’ve all seen irrational exuberance in the last six months of the previous bull market. At the time there were signs that something was unbalanced in the market.
There is no doubt that this has contributed to the overall growth of the crypto and blockchain industry. On the other hand, this imbalance, influenced by the hype and excessive leverage of institutional investors in the market, urgently needed to be corrected.
But unlike previous market corrections, crypto has matured significantly in recent years, and its ebbs and flows have moved in step with broader financial markets. The economic downturn in the international financial markets, accompanied by rising inflation, will affect the value of most cryptocurrencies.
The correlation of crypto’s swings with traditional financial markets is somewhat unusual in that Bitcoin and most other coins decoupled from the dollar early in the Covid-19 pandemic. This was the result of a deeply rooted belief that quantitative easing would lead to inflation and that Bitcoin and other cryptos are considered safe harbor assets.
Quantitative easing amid the March 2020 financial markets slump fueled by Covid uncertainty certainly played a role in the recent inflation we have witnessed. But let’s not ignore or overlook the price-boosting companies, the impact of the Russian invasion of Ukraine, or the global supply chain disruptions also factored in. However, crypto offered no hedge against it. Cheap credit and government benefits have fueled much of the Covid-era growth, and now many companies have crypto portfolios bought on credit.
As broader financial markets try to recalibrate before sliding deep into recession, it is clear that there will be a recovery – albeit a likely slow and painful one. When the eventual recovery occurs, the stripped down and battle-hardened crypto ecosystem will soar with it. This is a safe bet, but what is a little less clear is what role DeFi will play in a post-bearish world.
The future role of DeFi
Crypto Darwinism is already taking shape. Decentralized exchanges (DEXs) and DeFi platforms, which offer decentralized versions of traditional banking services, have weathered the crypto firestorm relatively well so far. The collapse of platforms like Celsius and Anchor has started shifting focus to the need for DeFi to play a bigger role going forward.
However, this collapse should not be viewed as a failure of DeFi as a fundamental step forward in the advancement of blockchain applications. These platforms have failed because they have failed to assess risk as any traditional financial firm should have, and not because DeFi ecosystems cannot provide a viable or even superior financial alternative to TradFi.
The advantages of DeFi are obvious. First and foremost, it enables fast and secure payments and transactions. Even traditional financial institutions see the value in this and have been exploring ways to get involved in providing their own versions of crypto services for years.
DeFi platforms are also able to make borrowing and lending much easier compared to traditional banks. Some platforms don’t even ask for collateral to get a loan. By removing the intermediary, DeFi streamlines the lending process, making it easier, faster, and more affordable for users.
Already a thriving hub for investors in digital assets, DeFi offers real potential to generate returns. Unlike traditional finance, DeFi offers a wealth of investment opportunities for retail investors to earn. These yield options include staking, yield farming, liquidity mining, and trading. DeFi is already a one-stop shop for the average investor or borrower.
As the bear market continues, DeFi is positioning itself as an irreplaceable cornerstone in the crypto universe. As the global economy tries to stave off a recession and centralized crypto exchanges go bankrupt, the moment that DeFi services take center stage is now, ahead of the next bull run.
A stronger role for DeFi will certainly benefit the broader crypto market, regardless of which direction traditional financial markets take. However, this does not mean that centralized exchanges cannot play a role in the crypto community. Centralized platforms play the important role of allowing people to cash out in fiat currency and that has value provided these platforms have cash available to pay out to users. DeFi simply has to be the standard outlet that supports the larger crypto ecosystem. Only with DeFi driving the crypto economy can we see a return to the bull market boom.
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