"Problems cannot be solved with the same thinking used to create them."
- Albert Einstein
2022 has been a year in which the crypto community was forced to relearn some old lessons. The linked collapses of multiple platforms has highlighted the compromises the sector has accepted as the price of growth.
Fallout from Terra, 3AC, Celsius, Alameda, FTX, and possibly Genesis has already exacted a heavy toll, and is likely to continue to do so long into the future. Aside from the obvious market crash, there will be lost confidence, reputational damage, new regulatory scrutiny, and lower investment in the months to come.
At REX Wire, we believe the answer is greater transparency, more decentralization, and less need for trust. Everything that can go on the blockchain, should go on the blockchain.
The Promise Of Decentralization
Bitcoin was launched in the wake of the Global Financial Crisis. The Genesis Block contains a reference to the near-collapse of the banking system—proof that the blockchain could not have been launched before this date, as well as an ideological statement:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
It quickly turned out that centralized platforms would be the weak point in the Bitcoin ecosystem. This message was underscored by the "Bitcoin Savings & Trust" Ponzi in 2011-12, and driven home in February 2014, with the collapse of MtGox, the largest bitcoin exchange in the world, in which 650,000 BTC were lost.
At the time, there were no alternatives to centralized exchanges. The solution was to build decentralized platforms, which began in earnest with the launch of Ethereum in 2015. The result was the DeFi industry, which grew to become a vast network of borrowing, lending, exchange, derivatives, and stablecoin protocols.
A Step Back For DeFi
Unfortunately, exchanges and "CeDeFi" platforms like Celsius took the blockchain's solution to the financial crisis and the fall of MtGox, and wrapped it in an old problem. The implosion of the Terra/UST ecosystem highlighted how dangerous the opacity of TradFi systems could be.
Terra itself did not represent a failure of transparency, per se: Its collapse was the free market weeding out a bad idea (though the Luna Foundation Guard held over 80,000 BTC and many other crypto assets in early May 2022, worth around $3 billion, and there was little transparency in the way these reserves were deployed to unsuccessfully prop up UST).
Had the crypto ecosystem consisted solely of DeFi protocols, the contagion would have been limited—or, at least, rapidly addressed by the market. It would immediately have been clear which protocols were impacted by the plummeting value of UST and LUNA.
That was not the case for centralized and opaque exchanges, CeDeFi services, and hedge funds. Certain organizations had massive exposure to Terra and other crypto assets that crashed when the Terra ecosystem imploded. The extent of these losses was hidden from public view, and is only starting to become fully apparent. 3AC, Celsius, and BlockFi were early casualties of Terra's annihilation; Alameda and FTX followed several months later, and now Genesis—the crypto venture capital company owned by Digital Currency Group (DCG), which also owns Grayscale Investments—is on the point of bankruptcy.
Back To Blockchain Basics
For the DeFi community, 2022 should be a wake-up call. The DeFi ecosystem has vulnerabilities we need to address (including bridge, MEV, and flash loan attacks). Work is already underway to do just that. Placing Web3 services within a TradFi wrapper and mindset simply substitutes one set of problems for another, at best, and compounds them at worst.
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