DeFi innovation has helped replace inefficient counterparty matching mechanisms on decentralized exchanges, but it relies heavily on large amounts of liquidity. New applications have focused on creating new high-performance tokenomic systems, bringing wealth to the participants, which has worked well for a while.
Unsound fundamentals have caused a rinsing out in the bearish crypto trading market, where several protocols will struggle to survive.
Bearish markets may be disastrous, but they often lead to significant innovations regardless of the sector. DeFi platforms are no exception to that situation, as a wave of innovation has historically occurred.
The projects that fueled the hype cycle preceding the current bear market did not bring major DeFi innovations. Since they focused on creating cash flows with super-loaded tokenomics, the most affected projects led to a dire state.
The current bearish market aims to separate the wheat from the chaff, where weakly-founded projects like Terra will go first.
Looking at those DeFi projects that focus less on the new tokenomics and return to technological innovation is crucial. A better DeFi infrastructure and creators to build it will help determine which platforms will last.
DeFi Innovation Introduced the Rise of Liquidity in 2020
The peer-to-pool model introduced a mechanism to accumulate liquidity on the Ethereum network. That has replaced inefficient counterparty matching mechanisms on decentralized exchanges, leading to the creation of the Uniswap automated market maker (AMM).
However, the operation of this model relies heavily on large amounts of liquidity. Therefore, models that took advantage of the token economy to serve the product inspired DeFi creators. For example, the FCoin Exchange mining trading mechanism introduced the centralized exchange in 2019 to reward users with tokens for their transactions.
Compound has gained popularity, making decentralized lending crucial to the DeFi landscape in 2020 by leveraging liquidity mining. After that, SushiSwap launched Pool 2 Mining, combining tokenomics with liquidity structures by adding leverage.
Although these innovations have been significant to DeFi development, this expansion has had increasing difficulties. The operation of all these protocols on Ethereum congested the blockchain. That slowed the innovation pace and led to a sluggish condition in the market.
DeFi Innovation Focused on Creating Tokenomic Systems since 2021
The recovery of the bearish market by late 2020 gave way to a wave of new protocols in 2021. These new applications have focused on creating new types of high-performance tokenomic systems, bringing wealth to the participants.
These protocols integrated existing technology stacks with new smart contracts, using algorithms to create positive feedback loops. That led to ever-increasing returns for liquidity providers and yield farmers, which worked well for a while. People earned significant annual percentage yields for lending and growing their assets.
However, people started selling their tokens as chaos broke out due to worse market conditions. The algorithm-driven virtuous cycles providing those high returns have ceased to work, as stablecoins have lost their pegs and cascading liquidations exploded across the market.
A combination of accumulated leverage, greed, and human arrogance has caused the recent DeFi market cycle. The entire market undergoes significant sell-offs at the end of each phase, while the bearish market shows no signs of ending soon.
Undoubtedly, the public will become more aware of the protocols that will last. Everyone will see the enduring performance of truly trusted technology in this industry.
By Alexander Salazar
