DeFi during the Coronavirus era: crises and opportunities
DeFi during the Coronavirus era: crises and opportunities

DeFi during the Coronavirus era: crises and opportunities

By Lorenzo Dalvit - 19 Mar 2020

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Many expected that decentralized finance (DeFi) would not be affected by the crisis of last week’s Black Thursday due to its alternative paradigmatic features, but as it turned out, faced with panic the cryptocurrency market suffered a terrible blow too.

The impact of Covid-19 in a strongly interconnected and fragile society like that of the 21st century will be remembered for a long time. Politics has a fundamental role to play in historical moments such as these and its blatant dependence on the economy is now a fact. 

This event has accelerated a path that was already taking shape a long time ago, the sovereign debt crisis and monetary policies to stimulate the economy are leading the system towards a point of no return

The importance of transparency in the financial sector

Transparency in the use of the funds put into circulation by the states is a vital point.

Who trusts what is happening in the Repo markets today? In September 2019, the Fed allocated $500 billion as a temporary intervention in the repo markets that was supposed to last a few weeks. This is the first time since the Great Depression that this has happened.

Last Wednesday, six months after that intervention, the central bank injected once again $500 billion. On Thursday they announced that they will continue to inject another $1.5 trillion into the repo markets, despite this the problem does not seem to disappear. On Monday, another $500 billion will be added to the repo market.

The Fed has already printed $2 trillion and Trump has declared a $1 trillion intervention in support of the economy. The $25 billion in Italy and $40 billion in France appear minuscule in comparison. How will this money be used? Who really benefits from it? 

In DeFi all income and expenses are public thanks to DLT (Distributed Ledger Technology), envisaging a different future is possible. Transparency must become an economic value.

Coronavirus and the economic crisis

There is a rationale behind the negative reaction of the markets: the impact of the coronavirus adds to an already weak global economy that was showing anaemic growth, high debt and a period of disappointing profits long before the virus even appeared.

The escape from any form of investment towards greater FIAT liquidity has triggered a spiral of events that could manifest problems coming from way back in time.

A stock market that has been in bubble territory for ten years has seen a sharp turnaround.

The panic generated by the Coronavirus outbreak has quickly turned into a global financial crisis that risks becoming political and social.

As in all panic situations, one of the greatest risks is represented by states that feel the need to do something, contributing to the same panic that they are called upon to mitigate. 

We must trust the scientific community and global collaboration networks, but we must also take into account that the Coronavirus card will be used as an excuse to reduce growth and employment estimates, blame an external enemy and allow states to access additional billions of dollars for debt-fuelled spending.

Building new horizons

If politics will not find the ideal solutions, perhaps society will build new models. DeFi, in their Alfa version, are a fundamental test case for creating an alternative financial system.

MakerDAO and the ecosystem that has been built on it, are only the beginning of this path. From Bitcoin to Ethereum via Zcash, diverse contributions are being made towards a new paradigm. The whole cryptocurrency sector is part of the experimental work.

Bitcoin has collapsed, but its downfall has stopped quickly.

As far as Ethereum is concerned, Maker’s liquidation process didn’t work as expected, leaving a number of lenders liquidated by sanctioning them with 13% tax. MakerDAO needs to auction off debts to cover a $5 million shortfall caused by the clogging of the Ethereum network that distorted the internal auctions.

All this has resulted in pragmatic reactions, demonstrating the anti-systemic fragility that characterizes this sector.

In 24 hours there were a series of public commitments to participate in the auction of MKR debt from well-capitalized sources, as well as the emergence of a DAO capable of managing a pool of capital that could act as a “last resort” if this were to happen again in the future. A proposal to add USDC to alleviate liquidity problems emerged within 72 hours.

A stress test that shows great promptness of reflexes and transparent solutions, albeit questionable for some.

Lorenzo Dalvit

Blockchain enthusiast tutor, expert in sales and marketing, social community manager, artistic director, musician, lover of disruptive paradigms and life. All my skill are about human interaction and connection

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