Decentralized Finance (DeFi) continues to play an important role in banking the unbanked and making the money market more efficient. Over the years, the DeFi sector has grown immensely, and the total value locked in the market hit a high of $1.235 billion in February. Since then, the number has dropped rapidly to a yearly low of $556.538 million, with investors panicking over the Coronavirus outbreak.

Over the past week, the total market capitalization of the crypto industry is down from over $250 billion down to $153 billion at the time of writing. Major Cryptocurrencies like Bitcoin and Ethereum are down more than 30% since the start of the year.

However, some DeFi proponents believed that the coronavirus-prompted recession would boost the popularity of Ethereum DeFi applications. Investor and crypto twitter personality Ryan Sean Adams had stated that the economic recession would create further confidence in Ethereum, driving DAI rates up and attracting “millions” of users. He said:

A scenario:



1. Corona sparked recession

2. Interest rates go to zero or lower

3. Crypto rebounds w/ a vengeance

4. DAI interest rates shoot up

5. Millions onboard for high yield DAI



As ETH rises DAI rates increase



And ppl will realize speculation isn't the only use case — Ryan Sean Adams – rsa.eth 🏴 (@RyanSAdams) March 11, 2020

But the heavy beating throughout the last few weeks has been proof of the fact that this is not the case. Investors are choosing cash over crypto assets, and the lack of liquidity in the market has resulted in severe problems for the DeFi space, especially for Maker, one of the earliest Ethereum projects and the dominant leader responsible for nearly 51% of the value locked within the lending sector.

Maker takes a hit

The massive losses sustained by the market on Thursday have resulted in losses close to $5 million for the project. The Ethereum network was under heavy load, as investors hurried towards exchanges to liquidate. This resulted in a glitch in MakerDao’s oracle that it uses for price feeds.

As a result, Oracles could not send accurate price data, and traders could not execute trades without paying high gas fees to record transactions onto the blockchain. The mass transaction action was due to Ethereum’s 30% drop in less than 24 hours. The steep drop caused a large volume of loans to drop below their collateralization threshold, which triggered liquidation proceedings.

Due to the high congestion in the Ethereum network, some liquidators were able to win the auction offering a 0 DAI bid, due to a total lack of competition. This resulted in $4 million in collateralized debt.

As of now, Maker is planning on conducting a debt auction for the first time, aimed to programmatically mint and sell MKR tokens in 50,000 DAI increments and use the funds raised to cover outstanding bad debt. Despite considering an emergency shutdown, the maker foundation has decided not to proceed, and as a result, the total bad debt has gone up to $5.5 million. This is terrible news for the DeFi market as a whole because MakerDAO’s system currently holds over 55% of all the Ether locked in DeFi projects

Before this, the DeFi industry lost more than $900,000 to two consecutive hacks on the popular decentralized lending protocol bZx.

DeFi proponents remain positive

Sowmay Jain, co-founder and CEO of DeFi-enabled wallet InstaDApp remained optimistic despite the crashing market. In a statement to media outlet Cointelegraph, Jain said:

“Such painful times remind us that we are extremely early in the space, and there’s still lots of room for improvement. However, I am very hopeful this will ensure that the DeFi ecosystem rises back with an even robust economy.”

Kain Warwick, Synthetix CEO and co-founder believes that the price decline has nothing to do with Ethereum’s fundamentals. He said: