When Oswald died, not everything fell apart.
Although Northumbria fell victim to its fissiparous tendencies, splitting back into the separate kingdoms of Bernicia and Deira, Oswald’s younger brother, Oswiu, assumed the throne in Bernicia, helped in large part by his alliance with the monks of Lindisfarne.
For their part, the monks at Lindisfarne had already established a church network in Northumbria and that carried on, largely unhindered by Oswald’s defeat. Penda, pagan though he was, was no holy warrior: he appeared to care little who his subjects worshipped so long as they deferred to him as their king.
But not only did the monks provide continuity in the wake of Oswald’s death, they also provided a reason for it: by their telling, Oswald died a martyr. Thus they turned his death from a defeat for the new religion into a victory, for martyrdom was the apotheosis of Christianity. Its founder had died a martyr and so had its greatest saints, including all but one of the Apostles. At a stroke, they had confounded the old religious metric that measured a god’s potency by his aid in securing victory. The new god was paradoxical and so was his religion. He himself was simultaneously God and man – and that was God in the upper case, unique and unequal. The God/man had achieved victory through his apparent, worldly, defeat. The entire logic of the Roman Empire rested upon the crucifix: enemies raised up to a public death on a cross were beaten, defeated utterly, their public humiliation and long-drawn out dying a statement of the power of the Empire and the folly of crossing it.
But the new religion took that death and, in a stroke of the paradoxical genius that made the religion something truly new, made it central to its proclamation.
So when Oswald died, losing in battle against Penda, it wasn’t a demonstration that the new god was weaker than the old gods because Oswald’s death recapitulated the death of his god. Rather, it became the basis of his ultimate triumph.