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Friday, June 14, 2024

5 Lessons From 2022 That Transformed Crypto Permanently

The collapse of the cryptocurrency markets over the past year has come as a shock to many people, including myself. That is lessons transformed crypto permanently. Who were driven to cryptocurrencies by the hope of improving or replacing an antiquated, exclusive, and exploitative global financial system. To be clear, technology did not play a major role in the majority of the significant financial blow to investors.

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Bitcoin Blockchain

For the Bitcoin blockchain, for instance, none of the controversy from the previous year is relevant. It continuously adds a block of transactions to its ever-expanding ledger every ten minutes. It serves as a reminder that despite market fluctuations, the worldwide, decentralized networks of computers running Bitcoin, Ethereum, and other permissionless blockchain protocols continue to create platforms for intermediary-free value exchange. I’m still in awe of these enormous autonomous machines’ persistence and presence.

Crypto

But “crypto” encompasses more than just cryptography, smart contracts, and protocols. Additionally, it is the group of people who have collected around this conglomerate of technologies. Without this community, the technology cannot be adopted in the real world and cannot bring about lasting change. And regrettably, it was their activities that led to the failures in 2022. There is widespread communal accountability in this situation, even though a select few individuals are rightfully assigned the lion’s share of the blame. On our watch, the robbery, deceit, and shocking violation of trust occurred.

Wealth Destruction of 2022

If we are to learn anything from the wealth destruction of 2022, it cannot be that Sam Bankman-Fried and people like him are solely to blame. The fundamental question is how to set up a system – not only a technology system but one of rules and standards – that makes it much tougher for people like SBF to accomplish what they did. SBF is deserving of the prison term he seems certain to get with his extradition to the U.S.

To develop that system in 2023 and beyond, there is a lot of work to be done. Yet it begins with the lessons learned in 2022. They are numerous. The five that I believe to be most significant are listed below:

1.    Cryptocurrency Does Not Exist in a Free Market.

It’s simple to forget that much higher losses hit cryptocurrency markets in the opening months of the year because the Federal Reserve was raising interest rates, rather than a crypto-endemic scandal, given all the attention the collapse of FTX in November garnered. This stopped an overabundance of money from streaming into speculative assets worldwide, including cryptocurrency. The larger environment is important.

2.    Excessive Leverage Invariably Results in Contagion.

There are numerous examples of the domino effect, which occurs when the failure of one crypto institution quickly spreads to another. It was present during the 1997 Asian financial crisis, the Long-Term Capital Management failure in 1998, the subprime mortgage crisis in 2008, as well as numerous other similar events in financial history. They all shared the same traits: an excessive buildup of loans to speculators was fueled by an unduly bullish conviction in the rising trend of financial assets. When those assumptions turned out to be false, the stampede for the door revealed a network of creditors and debtors that were dependent on one another and pulled each other down together. Due to the decentralized structure of the underlying protocols, crypto speculation was never going to be safe from this.

3.    DeFi is Resilient, but it Requires Ongoing Technical and Economic Audits.

FTX, Celsius Network, Voyager Digital, Three Arrows Capital, and Genesis were among the high-profile collapses in 2022 that featured custody-holding CeFi (centralized finance) businesses that put client funds at risk. This has energized proponents of DeFi (decentralized finance), who correctly point out that the reason the most resilient decentralized market-making and exchange systems have endured is because they do not have a reliable intermediary that can be used for such nefarious purposes. (Digital Currency Group, the parent company of CoinDesk, owns Genesis.)

However, as of October, Chainalysis reported that DeFi investors have lost a record $3 billion year to date as a result of smart contract breaches, founder “rug pulls,” and seriously defective tokenomics in some protocols. (The latter case is exemplified by the ecosystem’s devastating collapse on Terra.) DeFi is a dangerous, unexpected, perplexing, and wild environment. It requires a more thorough audit mechanism that evaluates projects’ tokenomics, founder practices, and code security by reputable independent analysts or bounty-hunting engineers in order to encourage mass involvement.

4.    A Reminder That Cryptocurrency Cannot be Sustained by “Number Go Up”

We should have all been asking more challenging questions in 2020 and 2021, when social media-driven meme coins were making young people millionaires overnight, DeFi projects were offering yields unheard of elsewhere in the world, and institutional and retail investment drove the market capitalization of cryptocurrencies up by a factor of 15 to almost $3 trillion. What’s behind all of this should have been the most crucial question.

We are left with nothing more than supposition for the sake of speculating when we peel back the layers of interlocking processes and the explanations for the returns they were promised. Most of that was constructed based on predictions that “numbers-go-up” in momentum trading. It’s time to go back to the fundamentals and focus on practical applications. Whether it be cross-border payments, decentralized energy, new marketing models provided by non-fungible tokens (NFTs), or one of many other potential use cases, token returns need to point back to actual value cases.

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5.    Crypto Needs a Knowledgeable, Unbiased, A0nd Aggressive Press.

Yes, this one is self-serving, but 2022 demonstrated that this sector does in fact require a strong “Fourth Estate” to hold those involved in it accountable. Blockchains without permission should be considered public goods, much like the air we breathe, the water we drink, or the roads we travel on. They need to be treated as such, which necessitates transparency (balanced with a respect for individual privacy). It also begs the question of why this wasn’t discovered sooner, even though we are all quite pleased of the catalytic role CoinDesk played in exposing the FTX house of cards. There aren’t enough professional-managed, crypto-savvy journalists covering this business, to put it simply. (This is why the New York Times and other publications published those simplistic articles that ignored SBF’s deceptive actions and enraged my colleague, David Morris.)

But this is the mountain I will die on: The necessary transparency cannot be attained only through the efforts of “citizen journalists” on Twitter or in other places. Those who argue that the FTX scandal was exposed by crowd-sourcing the investigative work of regular people on social media ignore the fact that Ian Allison’s investigative article, written within the framework of a professionally run newsroom with editors and management who have carved out a position of independence from their proprietor to earn the trust of their readers, was what set off the meltdown. Allison is a trained journalist. (CoinDesk is a DCG company, but it runs independently and upholds a fundamental code of ethics.) Where was all that Twitter crowdsourcing knowledge before Ian’s article?

If this business is to prosper, it cannot once more be caught off guard by accusations of serious misbehavior like those made public in 2022. This calls for transparency awareness and an understanding that journalists who investigate problems at pertinent institutions serve the long-term interests of this business rather than destroying it.

Uneeb Khan
Uneeb Khanhttps://www.hopequre.com/online-therapists
As a mental health counselor offering online therapy, I help clients heal past traumas, improve struggling relationships, and make positive life changes through services like clinical, behavioral, and relationship therapy. My online counseling targets issues from parenting challenges to preventing breakups, managing stress, overthinking, and more. I meet clients who are emotionally stressed and provide customized therapy facilitating deep healing, all conveniently through online sessions.

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