DeFi growth could lead crypto to the next bull run

• The crypto sector continues to battle masive contagion following FTX’s collapse and the 2022 bear market.
• Despite total value locked in decentralised protocols falling significantly amid the crypto winter, DeFi still shows considerable growth over pre-pandemic levels.
• Away from price action, DeFi and NFTs have shown massive potential to drive adoption.

In the depths of crypto winter it can be hard to predict where the next crypto bull run might come from – but the clues are certainly there.

While it’s too early to tell which assets will lead the market revival, the sector that will kickstart this rally is likely to be DeFi. Although not immune from the market malaise that’s permeated in the wake of the FTX scandal, the transparency and immutability on which DeFi is built have earned the industry plaudits amidst the recriminations.

Understanding why decentralised finance will be at the vanguard of any impending market recovery calls for a recap of how we got here.

Winter is here 

The last crypto bear market had its roots in rampant over-speculation. The ICO boom of 2017 eventually led to the ICO bust of 2018, taking vaporware projects down with it.

This cycle has been markedly different. The crypto winter of 2022 did not start with blockchain – the chill blew in from the wider global economy. 

It’s no exaggeration to say that the global economy has seen better days. Traditional finance and centralised systems have been rocked by a series of profound shocks, exacerbated by profound political mismanagement. 

Despite this, crypto bucked the trend last year, holding out against the macroeconomic headwinds. Eventually, however, the price of bitcoin began to drop from its November 2021 high and the market began its multi-month drawdown, slowly at first and then quickly.

The first major domino to fall was Terra (LUNA) and its dollar-pegged stablecoin UST. Then came Celsius, Babel, CoinLoan, Three Arrows Capital, Voyager, and BlockFi. More recently, Sam Bankman-Fried, FTX, and Alameda joined the list of the fallen, claiming plenty of collateral damage in the process.

In fact, the contagion had already worked its way through the entire crypto ecosystem during the height of the bull run. FTX was merely its apotheosis when the full extent of the cancer was discovered.

That contagion is centralisation.

It’s easy to forget the basics during the height of a bull run. When money is plentiful, greed gains a toehold, and users become complacent and soft. Crypto winter provides ample time for sombre reflection. 

The first lesson to be mulled is the simplest: decentralisation matters. Without it, the industry is only as strong as its CeFi leaders with their feet of clay.

Centralised finance asks that customers trust in a platform and hope that its leaders will do right by them. As customers of Celsius and FTX will attest, when that trust is misplaced in bad actors, there are disastrous results.

DeFi is working hard

Centralised crypto platforms may be suffering greatly, with a string of collapses this year, but decentralised finance continues to march on. The total value locked in decentralised protocols sits at $41 billion, a considerable fall from peak levels, but still showing remarkable growth from pre-pandemic figures.

The continuing resilience of DeFi represents a success story when compared to the ignominious failure of centralised crypto. DEX volumes routinely pass $1.5 billion a day while demand for onchain derivatives is growing, buoyed by FTX’s ungraceful exit. GMX (Arbitrum) and gTrade (Polygon) have joined DeFi derivatives leader dYdX in leading the charge.

Since the start of the year, dYdX has been working towards becoming fully decentralised. Version 4 is earmarked for launch in the second quarter of 2023 and will mark the evolution of the exchange into a wholly decentralised platform. dYdX chain will be built on Tendermint consensus technology and mark the arrival of the exchange on Cosmos. This will allow dYdX to offer customers “a fully decentralised, off-chain, orderbook and matching engine.”

Amidst all the brouhaha surrounding FTX’s demise and the resultant contagion that’s touched both CeFi and DeFi, the Cosmos ecosystem has been quietly getting on with business as usual. An ongoing incentivized testnet, dubbed Game of Chains, is helping validators develop confidence around Interchain Security (ICS). 

Once live, this feature will allow the Cosmos Hub to share security with “consumer chains” which will benefit from the security model supplied by billions of dollars of staked ATOMs.

Projects within the Cosmos ecosystem have been busily shipping too. Loop Markets, a platform for trading NFTs and DeFi assets, is building out its products on Juno, bolstered by a funding grant. In Q1, Loop will release Eclipse Launchpad to support new projects launching on Juno with the aid of IDOs conducted on Loop Dex.

Elsewhere, Cosmos developers Interchain Foundation have formed a Technical Advisory Board as part of their efforts to rebuild trust with the community, improve transparency and drive community engagement. From delivering better governance to improving protocol security, these efforts are helping to position Cosmos as the blockchain ecosystem likeliest to drive the next wave of DeFi innovation.

NFTs keep evolving

NFTs haven’t been immune from the year-long market downturn, with blue chip collections down an average of 75%. Step away from the price action, however, and you’ll find a sector that is brimming with possibility and purpose.

Beyond the collectibles scene, NFTs can be used for a wide number of purposes. From music to real estate, to digital IDs and real estate (both in the real world and metaverse), the applications of this technology are manifold.

In the music industry, NFTs are being used by musicians to tokenize their music and to directly profit from royalties and resales. This supports use cases like gig tickets being tokenised, removing the possibility of scalpers selling tickets on. NFTs are also being used in supply chains to improve records and make auditing simpler. Non-fungible tokens can even demonstrate ownership of real world property such as real estate rights and support fractionalization.

Conclusion

This crypto winter has its roots in the bad decisions of centralised authorities. Over the past three years, governments and central banks around the world have proven to be spectacularly poor custodians of the financial world.

Bad decision after bad decision has crashed economies, destroyed labour markets and instigated runaway inflation that’s devalued fiat currencies and eroded consumer spending power.

Crypto has not been immune from poor centralised planning either. Bad decisions in national government have been compounded by bad actors within the crypto industry itself. Centralised companies including exchanges, lenders, and venture capitalists got greedy.

The antidote to this is decentralisation. While decentralised platforms are not immune to wider economic forces, they have proven better equipped to handle the very worst of the duress. 

Decentralisation and those who stick with it will eventually emerge from this winter stronger than ever.