Key Points
- The COVID-19 pandemic had significant impacts on the cryptocurrency market, including Bitcoin and Ether.
- Decentralized finance (DeFi) and nonfungible tokens (NFTs) experienced significant growth and development during this period.
The global health crisis triggered by COVID-19 in early 2020 had far-reaching effects on both human lives and the global economy. The cryptocurrency market was not immune to this, experiencing a significant drop in March 2020. On a single day, Bitcoin lost 52% of its value, while Ether saw a 43% decrease, causing a ripple effect in the decentralized finance (DeFi) sector.
The Impact of Lockdown on Crypto
The lockdown measures implemented worldwide had a slower, yet more profound, impact on the crypto world. As people were confined to their homes, screen time increased, and so did interest in cryptocurrency. This led to a surge in market capitalizations and accelerated development and implementation of emerging technologies.
DeFi’s Rapid Growth
The first steps in DeFi were taken in 2017 with the development of smart contracts on the Ethereum blockchain. MakerDAO (DAI) and Compound Finance (COMP) emerged as early market leaders. In June 2020, Compound Finance introduced yield farming, a method of arbitrage that shifted crypto assets to attain the highest interest, fees, and rewards. This practice has since become widespread.
Compound Finance also led the way in decentralization, introducing the first governance token, COMP. This allowed users to participate directly in the management of the Decentralized Autonomous Organization (DAO). By the end of 2020, many DAOs were undergoing decentralization.
A DAO is a concept for a company that operates under enforced digital rules without hierarchical management. The idea is similar to Bitcoin’s objective of eliminating intermediaries in transactions. By September 2020, DeFi collateral levels had risen from $700 million at the start of the year to $9 billion.
Decentralized Exchanges and the DeFi Summer
Decentralized exchanges (DEXs), another form of DAO, were already in existence by 2020. DEXs allow users to trade crypto assets peer-to-peer (P2P) without an intermediary. These exchanges gave rise to automatic market makers, which capitalized on yield farming. The increased activity in the DeFi sector led to a “period of price explosion,” known as the DeFi Summer of 2020.
The third Bitcoin halving occurred just before the DeFi Summer, on May 11, 2020. This event, which reduces mining rewards by 50% after every 210,000 BTC are mined, is designed to prevent inflation by slowing the pace of mining. It also increases demand by reducing production. Bitcoin was trading for around $8,800 during the third halving. It saw minor gains in July and August 2020 and began a significant upward price trajectory in October, reaching $63,000 by April 2021.
2021: The Rise of NFTs
Nonfungible tokens (NFTs) are unique digital items on a blockchain. Although they have been around for several years, the market for NFTs didn’t take off until 2021. NFTs have been used for various purposes, including ticketing, licensing, gaming, identity verification, and music. Their earliest uses were for gaming, collectibles, and artwork.
The Bored Ape Yacht Club line of NFTs was launched in April 2021. By the end of the month, all 10,000 of them had been sold, raising $3 billion. The lower-cost Mutant Ape Yacht Club was launched in August 2021, and Mutant Apes are still being minted today.
In 2017, there were around 120,000 NFT users. Their numbers grew to one million in 2020 and 3.5 million in 2021, then 9.9 million the following year. Revenue from NFTs jumped nearly 40,000% from 2019 to 2021, but declined sharply in 2022. OpenSea, a marketplace founded in 2017, held 87% of the NFT market at the beginning of 2022, but trading volume fell by 99% over the course of the year. Despite this, revenue from NFTs continues to grow and is expected to reach $2.4 billion in 2024.
