DeFi Performs In The Toughest Market Conditions
There is one truth about the markets; they move in cycles of booms and busts. This spring and summer is not the first time crypto has been in a strong downtrend. And what has made this bear market so brutal is the global macroeconomic conditions that caused a liquidity crunch across all sectors.
You might have heard about the recent insolvencies and bankruptcies of centralised lending institutions with billions of dollars under management, resulting in the freeze of customer withdrawals overnight.
- Celsius, a crypto lender with $20 billion worth of assets under management, was recently forced to freeze customer withdrawals.
- BlockFi, one of the top 5 largest crypto lenders, was essentially bailed out by FTX with a deal that provided a $400M line of credit.
- Voyager filed for bankruptcy protection blaming a crypto market crash that caused it to freeze customer withdrawals. Just like Celsius and BlockFi, Voyager is also one of the largest crypto lenders with $5.9 billion in crypto assets at the time of its bankruptcy filing.
Voyager went one step further advertising blatantly that customers’ funds held by Voyager are FDIC insured. The FDIC issued a cease-and-desist statement to Voyager because of the false claims that its customers would have government protections.
However, those were the centralised finance institutions (CeFi) with no transparency on the usage of customer funds. They went silent, but DeFi is working 24×7.
Decentralised Finance worked well, and protocols like Aave, Compound, MakerDAO – all functioned flawlessly 24×7. DeFi allows customers to monitor the protocols on the blockchain. CeFi institutions rely on vague promises and false claims, with little to no transparency.
The collapse of the major CeFi institutions can largely be attributed to the fact that they did business with counterparties (the likes of 3AC) that went either insolvent or bankrupt. However, The troubled CeFi institutions were forced to pay back the outstanding loans on DeFi protocols first, as the rules were enforced by smart contracts that are fully transparent and don’t rely on counterparties for settlement.
Celsius was forced to pay down its $400M DeFi loans on Maker, Aave, and Compound to prevent its collateral from being liquidated. The over-collateralization in DeFi protects the solvency of the protocol and customers’ funds.
These unfortunate series of events during Q2 2022 have proved that core pillars of DeFi, like lending and AMMs function as intended with foundations that are rock solid and fully transparent.
DeFi is the financial backbone for the entire economic ecosystem built on blockchain, both for retail and institutions. DeFi lending protocols rely on over-collateralization with far better risk management to secure the lenders’ funds in case of an unforeseen scenario where chances of a default are higher.
We see lending and borrowing in DeFi becoming the ultimate gateway to crypto for retail and institutions that are looking to grow their capital in a secure and sustainable way with full transparency.
Bear markets are part of the market cycles. History tells us that bear markets drive innovation where the sidelined capital flows towards high quality projects that focus on long-term sustainability. At Minterest Labs, we started #BUIDLing in September 2020 and have achieved numerous technical milestones since then, including a highly sophisticated risk probability engine enabling users to mitigate their portfolio’s liquidation risk and significant improvements in the product design inspired by the elegant design of the Porsche 911 GT3 dashboard. We are now targeting an early Q4 2022 launch date with updated tokenomics.
DeFi will rise and shine because of the sheer nature of true decentralisation where you don’t need to trust a counterparty who is incentivized to twist the truth. The rules are enforced by smart contracts, providing visibility and transparency on every transaction that brings accountability.