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Decentralized finance (DeFi) has been one of the fastest growing sectors in the crypto space since its emergence in 2018. However, like many other sectors, DeFi has seen a negative impact in the current bear market.

While the 2022 downturn wreaked havoc on many DeFi projects – and the cryptocurrency space in general – some continue to grow.

Bear markets, while challenging for investors, can spark game-changing breakthroughs in the industry, and a new era of creativity seems inevitable if past events are any indication.

This leads to the question: which protocols will usher in the next generation of DeFi technological advancements, and which will not?

The fable of the ant and the grasshopper can give an indication.

While the ants are busy storing food for the winter, the grasshopper is busy playing the violin and singing in the summer. Finally, when winter comes, the grasshopper will ask the ants for help because it is cold and hungry. Unfortunately, the ants don’t want to help him and tell him that he should have spent his time getting ready for winter instead of wasting it on something else, so he’s on his own now.

The moral of the story is that it pays to make diligent use of your time in order to prepare for the future.

Similarly, many of the projects that fueled the euphoria that led to the current market downturn have not significantly advanced DeFi’s underlying technology. They used overleveraged tokenomics to focus on creating cash flow instead.

Thus, it seems reasonable to think that protocols focused on hype and profit are most likely to fail during a bear market, while projects focused on creating real value for the user have more likely to survive.

John Patrick Mullin, co-founder of SOMA.finance, a decentralized marketplace for digital assets and compliant digital securities, told Cointelegraph:

“Many DeFi project founders seem to be focused on the hype train and doing more of what has already worked to make a quick buck. However, I think what the space and its users really need to to flourish, regardless of the market situation, is more foresight and innovation from industry leaders.”

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While it’s clear that some projects in space appear to be primarily profit-driven, some believe there are more sustainability-minded founders out there.

Linh Han, CEO of Hectagon, a DAO-based investment platform, told Cointelegraph, “The pressure and characteristics of the market force project to get a short gain. In addition, it also forces the founders to compromise more. However, the founders of the Defi space are not myopic. Truly, no one who comes into the crypto space to build so soon is myopic.

How DeFi platforms fared during the bear market

Part of the DeFi sector, notably the lending market, has shown its ability to weather the ups and downs that the industry as a whole is experiencing. The aggregate amount of loans created demonstrates that there is still significant demand for these DeFi protocols.

Despite current market conditions, DeFi lending platforms continue to grow in user engagement. According to data from Defillama, the amount of money blocked on DeFi platforms increased by more than 500% since last year.

Additionally, Aurora, a Ethereum virtual machine network compatible on the Near Protocol, launched a fund of 90 million dollars to support DeFi applications on the network. This will help developers continue to build within DeFi, potentially bringing new platforms into the space.

Aurigami, a liquidity and lending protocol on Aurora, raised $12 million to help them grow their platform under current market conditions. The platform currently has the highest TVL on Aurora, and they have performed risk analysis and worst-case scenario simulation for the protocol.

Building during a bear market allows platforms to gain loyal users and build a base before the next bull market. However, there were also negatives during this period.

For example, the Terra blockchain ecosystem collapsed earlier this yearfalling by more than 80% and resulting in more than $40 billion in investors’ losses. In a previous interview Along with Cointelegraph, Mike McGlone, Senior Commodity Strategist at Bloomberg, said Terra’s collapse was part of a natural purge in the crypto space that happens in every bear market.

This brings us back to the fact that some protocols are unprepared to deal with market downturns, especially when large coordinated sales were suspected to be one of the causes of the collapse of Terra Classic (LUNC) – formerly Terra (LUNA) – and its stablecoin TerraUSD (USTC).

The bear market is an opportunity

Bear markets can help legitimate projects that continue to build and innovate stand out, while hype-based projects slow down or fail. Mullin agrees with this view, telling Cointelegraph:

“Bear markets tend to weed out weaker projects and founders looking for a quick win. If projects are to not only survive but also thrive during the bear market, they have no choice but to d ‘innovate and create real value for the space and its community.’

Lucas Huang, co-founder of Aurigami, told Cointelegraph, “The market has always been cyclical in nature, and regardless of the circumstances, there will be opportunities to exploit. This market downturn is an opportunity for platforms. to build, refine, and innovate, all without the excitement and distractions of a bull market.” Huang continued:

“Experienced investors will always find value regardless of market conditions, and we see this bear market as just a change in user behavior. Is the bear market having a negative effect on DeFi platforms? But DeFi is dynamic enough to provide both bullish and bearish utility; the question is, what can you do to take advantage of that?”

Projects that continue to grow during bear markets can also gain long-term users who are more likely to stick around, instead of fair weather investors who only show up during bull markets.

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The bear market is the perfect time for new technologies to enter the crypto space. Indeed, some great innovations have emerged from the crypto winters. For instance, Ethereum had its token sale in the bear market of 2014, while the decentralized exchange platform Uniswap has been deployed on Ethereum in the bear market of 2018.

Milana Valmont, Founder and CEO of KIRA, a decentralized DeFi application hosting network, told Cointelegraph:

“The best innovations happen during a bear market because teams are all in on developing breakthrough technology. Standards are high during a bear market, so new ideas are tested under pressure and not sustained. alive by the liquidity of the bull market. Innovation during a bear market is exactly how the period of rebirth came to fruition.”

Vid Gradišar, CEO of NewsCrypto.io, a social and educational crypto platform, told Cointelegrpah that the bear market is like a “self-care routine” for the cryptocurrency space, in that “The excessive noise of unsustainable business models is silenced, giving everyone the opportunity (and the need) to focus on what matters in the long term.

“Some of the best crypto innovation happens in bear markets, but when you look behind the scenes, that should come as no surprise. In a bull market, the incentives are often skewed towards unsustainable business models. At the same time, those who want to build something truly long-term are more drawn to the relative calm and rationality that accompanies an excessive general lack of interest in crypto.”