Chicken Little might as well have been a HODLer when he said, “The sky is falling” as Bitcoin fell about 70% from its an all-time high of US$68,672 and the entire crypto market, which once had a combined valuation of approximately US$3 trillionNow to 1 trillion US dollars.
As crypto tries to stop its freefall and its critics and skeptics rejoice in the misfortune of many lose their savings, the elephant in the room is the long-term viability of crypto as an investment. The smallest, but perhaps most important, elephant is the question of which direction decentralized finance (DeFi) will take off once the bear market eliminates weak and fraudulent projects from the industry.
To understand this, it is important to analyze and understand the current state of both crypto and non-crypto markets.
From bull to bear
Of explosion of NFTs (non-fungible tokens) to blockchain game In the face of unprecedented valuations, we all witnessed irrational exuberance during the last six months of the previous bull market. At the time, there were signs of imbalance in the market.
There is no doubt that this has contributed to the overall growth of the crypto and blockchain sector. On the other hand, this imbalance, influenced by media hype and overindebtedness by institutional investors in the market, was in dire need of a correction.
But unlike past market corrections, crypto has matured significantly over the past few years, and its ebbs and flows have been in sync with the broader financial markets. THE economic shift observed on international financial markets, accompanied by galloping inflationwill impact the value of most cryptocurrencies.
The correlation between cryptocurrency fluctuations and traditional financial markets is somewhat unusual in that, at the start of the Covid-19 pandemic, Bitcoin and most other coins decoupled from the dollar. This was a result of the entrenched belief that quantitative easing would lead to inflation and that Bitcoin and other cryptos were considered safe haven assets.
Quantitative easing in the context of the financial market collapse in March 2020 caused by Covid-related uncertainty certainly played a role in the recent inflation we have seen. But let’s not ignore or overlook price gouging companies, the impact of the Russian invasion of Ukraine or the global supply chain disruptions that have also been taken into account. However, crypto did not end up providing protection against this. Cheap credit and government benefits have fueled much of the Covid-era growth and many companies now have crypto wallets purchased on credit.
As financial markets attempt to recalibrate before falling into a deep recession, it is understood that there will be a rebound – although it will likely be slow and painful. When the eventual recovery occurs, the lean and battle-tested crypto ecosystem will rise with it. It’s a safe bet, but what’s a little less clear is the role DeFi will play in a post-bear market world.
The role of DeFi in the future
Cryptodarwinism is already taking shape. So far, decentralized exchanges (DEXs) and DeFi platforms offering decentralized versions of traditional banking services have weathered the crypto storm relatively well. The collapse of platforms like Celsius and Anchor has started to refocus attention on the need for DeFi to play a larger role in the future.
This collapse should not, however, be seen as a failure of DeFi as a fundamental step forward in the advancement of blockchain applications. These platforms failed because they failed to assess risk as any traditional financial entity should have, not because DeFi ecosystems cannot offer a viable or even superior financial alternative at TradFi.
The benefits of DeFi are clear. Above all, it facilitates fast and secure payments and transactions. Even traditional financial institutions see the value and have been exploring for years how to get involved in providing their own versions of crypto services.
DeFi platforms are also able to make borrowing and lending much easier compared to traditional banks. Some platforms do not even require collateral to receive a loan. By cutting out the middleman, DeFi streamlines the lending process, making it easier, faster, and more affordable for users.
DeFi is already a thriving platform for investors in digital assets, offering real potential for earn returns. Unlike traditional finance, DeFi offers a multitude of investment options for retail investors to make money. 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 staple in the crypto space. As the global economy attempts to avoid a recession and centralized crypto exchanges go bankrupt, now is the time for DeFi services to take center stage, ahead of the next bull run.
A more pronounced role for DeFi will certainly benefit the broader crypto market, regardless of the direction in which traditional financial markets move. However, this does not mean that centralized exchanges have no role to play in the crypto community. Centralized platforms play an important role in allowing people to cash out in fiat currency, and this has value, provided these platforms have liquidity to pay out to users. DeFi simply needs to be the default outlet supporting the larger crypto ecosystem. Only with DeFi driving the crypto economy can we see a return to the bull market boom.