Decentralized Finance (DeFi) is still a newcomer to the financial school playground, but if it’s something, it’s to learn from its knockdown, go home, and improve instead of quitting it. An up-and-coming crappy fighter that does the job of, smarter, stronger, more elastic, and more robust than ever. This is due to Bitwise investigating the highly overlooked resilience of the DeFi market recently, even in the event of a Terra UST / Luna crash.
The DeFi credit market is one of the largest sectors of cryptocurrencies today, with a market capitalization of $ 8.5 billion and total deposits of over $ 50 billion, but struggling to reach its current state. Lessons needed.
DeFi allows investors, whether cryptocurrencies or not, to generate yields from crypto assets by making them interested in crypto assets deposited with protocols like Compound. In the DeFi credit market, investors deposit cryptocurrencies into “loan pools”, which are used as collateral for borrowed stablecoins.
The start of the 2020 pandemic, when all asset classes plummeted, had a particularly significant impact on crypto, as some believe it to be one of the most risky of risky assets. Millions of dollars have been cleared as prices of all the largest crypto assets have fallen sharply, volumes have skyrocketed in decentralized protocols, and lending protocols have failed.
This is aimed at being dealt with by the largest DeFi players and never happening again.
“Major players have been patiently implementing lessons learned and are more sophisticated than ever in managing risk and optimizing growth and resilience. As a result, they focus on fine-tuning stability and scalability. With the system in place, category conversion is underway, “the author of the bit-by-bit article writes.
Image source: Bitwise
Since then, two lending protocols, Aave and Compound, have gone through that pace. In May 2021, ETH fell 41% in one day, meaning both protocols processed $ 330 million in liquidation in one day and more than 100 times the assets caused bankruptcy in March 2020. There was no bankruptcy with.
DeFi performance during UST crash
I wanted to know how Compound and Aave worked with the surge in sold-outs that occurred around the time UST collapsed, so I asked Bitwise to follow up.
“There was a $ 60 billion explosion, the system was cleared, there was no bailout, there was no cascade of liquidation failures. The ground shook and the foundation was laid. Bitwise’s DeFi research analyst. Ryan Rasmussen states in his communication with VettaFi.
It turns out that DeFi remains resilient and robust, even as the market panics. Since the 2020 crash, a number of parameters and tools have been implemented, including collateral factors, interest rate models for each loan pool, and reserve factors.
“An analysis of the gauntlets of on-chain activity from May 9th to May 12th showed that Aave and Compound were working smoothly during the recent market sale and the end of UST / LUNA. Neither protocol caused a serious bankruptcy (it happened to the entire dust account, which means that the cost of clearing was much higher than the profit of the clearer because the amount was so small). “Rasmussen explained.
So what about Stablecoin? In the first place, what has incorporated cryptocurrencies into this whole turmoil, or at least this latest turmoil? Well, it’s not the stablecoins themselves that matter, but instead a subset of the real-world unsecured algorithms that underpin them, which is exactly what we see in the market. There was a panic surrounding the collapse of UST and its sister token, Luna, after UST lost a peg to the dollar, and the horror temporarily transferred to other stablecoins like Tether.
“Stablecoin, which is under-collateralized (or algorithmic), has not yet proven its sustainability, but is over-collateralized (eg DAI) or other flatback (eg USDC). Tablecoins have been around for years, “says Rasmussen. “They are promising applications for crypto and blockchain technology innovation and are resilient so far.”
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