The Anti-Fragile System: DeFi
The recent crypto crashes have shocked investors all over the world, but DeFi absorbed the shock without a hitch. Below I’ll analyze how this upcoming financial system reacted and explain the important concept of Anti-Fragility.
What The Hell Does Anti-Fragile Even Mean?
Anti-Fragility is a concept in which chaos and stress make something stronger over time. A great example to comprehend this is fitness. When you work out, you’re tearing up and stressing your muscle fibers. That doesn’t sound so good, does it? The reality is that the muscles build themselves up stronger than before, due to the stress that was exerted upon them.
“What doesn’t kill you only makes you stronger.”
Crypto and especially DeFi are the same exact way. Periods of stress make the system more resilient than before. Design flaws are discovered and then patched, making the probability of a complete collapse less likely as time goes on. Defi is a muscle that gains strength as stress is added, even if it’s painful in the short term.
Traditional Finance is the opposite, any type of stress exerted leads to financial crises and requires the Fed to come in from time to time for bailouts. That’s where the phrase “Too big to fail” comes in. These financial institutions failing will literally rekt the entire economy and bring everyone down with them. Not so fun huh? I will touch on this point again near the end of the article. In the meantime, let’s examine DeFi’s Anti-Fragile journey.
March 12th, 2020, AKA Black Thursday
Black Thursday was truly a scary day in which crypto asset prices completely collapsed, systemic issues with Defi protocols were revealed, and some funds and businesses went under.
The price drop caused a massive spike in gas fees which led to price oracles to report the wrong prices for crypto assets. Oracle operators were trying to get their stuck transactions to go through while MakerDao lost over $4,000,000 due to incorrect price oracles and design flaws within the protocol. Even conservative depositors who borrowed a safe amount of Dai were wiped out. Other protocols faced liquidations as well, but MakerDao took the brunt of it. This led to a discussion of a couple of centralized “band-aids” since the narrative became that DeFi won’t be able to work. DeFi eventually recovered from this event and went on to have its best full year to date.
The May 2021 Crypto Crash
In May of 2021, crypto faced a similar situation in which Bitcoin lost over 50% of its value while altcoins lost 60-80%. The difference this time? Defi was completely unscathed. let’s examine:
$1 trillion was wiped out from the crypto market. The leveraged liquidations went smoothly due to over-collateralization in the smart contracts, only speculators got rekt in this instance.
No protocol failures
No exchanges had big losses
No funds or businesses needed a bailout
There was no risk to the rest of the financial market and the Fed didn’t need to step in
Oracles worked as expected, with Chainlink being the gold standard
(Follow @RaoulGMI on Twitter, he has a great thread regarding this)
While it’s probable that DeFi will have growing pains considering it’s so young, as time goes by it will become exponentially less probable.
In Conclusion
The DeFi ecosystem was put through a massive stress test and passed with flying colors. This alone makes it superior to TradFi already, and it’s less than 4 years old! Such a catastrophe drop in TradFi would’ve required bailouts, would’ve required politicians to argue and impose more regulation, and the cost would’ve been passed down to the average person like in 2008. A fragile system indeed.
Anti-Fragile > Fragile
Captain BTC
(This is for educational purposes and does not constitute financial advice)