COVID’s Aftermath: Does DeFi Overperform Traditional Finance?

By Stan Peterson
August 6, 2021 Updated August 6, 2021
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COVID-19 sucker-punched the world’s economy in a way that hasn’t been seen for generations, and businesses have had to deploy a lot of resources to stay afloat. And much has changed ever since 2019. However, the damage to human lives and national economies is still very relevant today, particularly in developing nations. 

The World Bank expects the global economy to expand by 5.6% this year. Despite the expectations of a robust post-recession recovery, the rebound will likely be uneven across nations. Major economies will set the stage for recovery, while emerging ones are expected to accelerate growth rates to 6% this year. 

However, for low-income economies, this stage represents the slowest economic expansion in the last twenty years. 

Some industries have found ways to bounce back, carving a path around current limitations and realigning their goals. Sectors like healthcare, renewable energies, and telecommunications are all thriving. Though the S&P500’s recovery was largely dominated by large-cap tech stocks, other businesses are also redirecting their efforts to keep things running. With the pandemic putting pressure on the systems around us, people have begun investing in the new world.

Rapid Reallocation

Plummeting markets pushed investors into a primarily risk-off mentality, pulling capital out from riskier investments and redirecting it to (perceived) stable holdings. In terms of risk tolerance, investor risk/return expectations have changed dramatically, especially concerning factors like liquidity, price stability, and long-term value. Businesses have had to adapt to remote working requirements, causing a general shift in how companies approach work. 

This has led to a general reallocation of investor portfolios while fixed-return instruments continued to depreciate. People have started questioning the efficacy of government bonds as hedges against market downturns, and investors have naturally gravitated towards decentralized markets. Since January last year, DeFi has grown from a TVL (total value of assets locked in the ecosystem) of under $700 million to nearly $60 billion today. 

Unlike the traditional financial market, decentralized finance (DeFi) has opened up an esoteric but rapidly expanding world for all kinds of investors, from high-profile, tech-savvy VCs to family offices and other wealth management institutions. Even the space’s biggest skeptics have started capitalizing on investment opportunities in DeFi through the many related products, from liquidity pools to NFTs and yield farms. 

Despite the lucrative yield rates and potential for tax efficiency luring in traders from diverse demographics, the high volatility, intense competition, and a structure that affords more power to a select few projects make DeFi seem daunting for new investors.. 

Though an unexpected series of events led the space’s TVL to decline from its peak at $88 billion, projects are slowly recovering. And, with institutional funding rapidly entering the space, it’ll be interesting to see how decentralized finance frames blockchain’s abilities.

Verified Volatility

While the global economy took a massive hit owing to the pandemic, the same cannot be said for the digital assets ecosystem, primarily because of DeFi. For years, Bitcoin was considered an extremely risky investment, but the last couple of years has shown just how much value decentralized finance brings to the table, pushing Bitcoin and other cryptocurrencies into a much more popular alternative investment class. 

Risk can be rewarding, but they say the best way to grow a portfolio successfully is to make as few wrong decisions as possible. In times of risk aversion , people demand access to assets with a lower risk exposure. This has catapulted digital assets into the mainstream, with institutional investors perking their ears at opportunities to fund budding DeFi startups. 

It’s hard to decentralize financial markets without involving some risk. New projects are constantly popping up, bringing unprecedented innovation and accelerated growth to the space, but for each one of them, there are tens (if not hundreds) of projects that fail. These networks lay dormant, with tokens that produce no value for the market, and here’s where projects like Bonded Finance are disrupting the scene. 

Bonded Finance is making waves in DeFi, tapping into a market that hasn’t been touched. There are thousands of projects in the DeFi space, but the dominance of a handful of them creates a clear imbalance in capital distribution. 

In fact, Bonded Finance has identified over $50 billion in untapped liquidity from tokens that lay dormant in wallets.

Bonding DeFi Together

DeFi presents a fast-paced world of high-frequency transactions, often characterized by intense competition and short-term opportunities. As grandiose and anarchic as it sounds, this is far from the financial inclusion blockchain set out to create. One of the main drawbacks of the DeFi space that Bonded is solving is how illiquid assets prevent investors from creating more diverse portfolios. 

Liquidity has always been a primary concern for digital asset markets, and the high volatility levels that come with low liquidity can lead to wholly devalued investments from an inability to move out of those positions. With Bonded Finance, traders can invest in a single token representing the most high-yield investments in the realm of DeFi. 

Using an advanced machine learning algorithm, the Bonded platform can automatically identify and rebalance its internal portfolio to back the most profitable tokens in the market. Additionally, through its Accelerated Crypto Loan (ACL), Bonded Finance allows its users to directly contribute to the market’s liquidity by depositing assets into its liquidity pools and earning rewards. They can also borrow funds by depositing holdings as collateral. 

Besides volatility and liquidity risk, Bonded also does a great job protecting portfolios from inflation through its Straight Staking rewards program. This lets users diversify their portfolios among numerous assets, mitigating the risks associated with putting all your eggs in one basket and acting as a hedge against monetary inflation.

In addition to these perks, users are rewarded for infusing liquidity on Uniswap, the most popular decentralized exchange (DEX) in return for Bonded Finance’s native BOND tokens, which also allow participants to vote on governance decisions. Bonded offers the best financial instruments for volatile assets with low liquidity, and its robust, automatically rebalanced portfolio makes it a convenient solution for anyone entering the DeFi space.

Since DeFi was introduced to the world, thousands of projects have started operations, attempting to bring to and create value for the industry. Though not all of them are worthy of investment, Bonded helps investors stay on top of the quickly changing trends in the space, all while holding a single asset backed by a constantly evolving diverse array of assets.

Being an active participant in the Blockchain world, I always look forward to engage with opportunities where I could share my love towards digital transformation.
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.

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