Searching for the Crypto Future Under the Ashes of 2022
2022 was to crypto what Kryptonite is to Superman — made it go from God-mode to a pussy. It was almost as if the 2020 pandemic had its crypto-specific version, and the fatality rate was extremely high.
Crypto companies were crashing right, left, and center. Every time we thought it couldn’t get worse, we had a sequel waiting to take us by surprise (or by the balls).
And this time around, it wasn’t even half-baked, completely shady ICO projects funded by unsuspecting investors, like in 2018. Rather, we saw the big guns of crypto, backed by the smartest investors tumble down and fail to find any support.
The first domino fell when the purported algorithmic stablecoin UST lost stability, causing an avalanche within the Luna network. That further dragged down the LUNA token from $80 dollars to a few cents.
Years from now, on a sunny summer day, when you’re paying for your grandkids’ ice creams using a cryptocurrency, you can tell them, “that’s how $60 billion dollars were wiped off of the crypto market in a matter of days.”
This, however, was just the start. There was no way a $60 billion wipe-off didn’t cause any ripple effect. So, a crypto investment fund called 3AC, which had $10 billion in assets, went bankrupt, further leaving many companies that lent assets to them gasping for air (or funds).
Soon, we saw other major companies like Voyager Digital and Celsius Network bend the knee, or break it.
But in 2022, it didn’t seem like the crypto industry wanted to settle down with the drama. So we had more — the most dramatic (traumatic??) one so far.
A CoinDesk report on Nov. 2 revealed that the financials of the second largest crypto exchange FTX didn’t add up. Over the next week, the world realized that things not only didn’t add up, but in fact, there was nothing to add up to. Thanks to a financial hole bigger than $8 billion in FTX’s books.
That, as you may guess, led to a few other major and minor bankruptcies.
This Day — The Resultant of Those Days
All of what we discussed above combined with multiple other global macroeconomic factors have left the crypto industry in a tight spot.
Crypto market capitalization nose-dived from $3 trillion in November 2021 to below $800 billion at the time of writing (Jan 11, 2022). Very few projects were strong enough to not fall more than 70 to 80%. The worst hit got wiped off almost entirely.
Both retail and institutional investors have once again grown skeptical of the industry. While we’re glad that the SHIBA, DOGE, and the whole sh*tcoin crowd doen’t make a lot of noise anymore, it hurts to see institutional investments reach new lows.
In November 2021, VCs trusted Web3 projects with over $7 billion. In 2022 November, just $1 billion. Here’s a chart showcasing the decline in VC investments:
Source: DeFi Llama
Talk about trust issues!
The interesting thing is, “trustlessness” in crypto meant we didn’t have to trust any central entity because we could verify every bit of information. It wasn’t a flaw but a feature.
The meaning of the word has changed. People are desperate to find something or someone they can trust. But trust is hard to find here. Good projects… even harder to look for.
The bottomline is, throughout 2022, we’ve been in a pickle more times than we’d be comfortable admitting down the line. What we have to admit, though, is that the industry as a whole learned many lessons.
What Doesn’t Bankrupt You, Makes You Wiser
But first… let’s look at something that’s wrong.
For many, the concluding argument after seeing the crashes and the bankruptcies has been very simple:
Centralized = bad
Decentralized = good
As a result, you’ll see crypto and Web3 proponents often bring up the events of 2022 to tell you that decentralization and self-custody are the only way forward. That there is no room for centralization in Web3. That everything centralized is evil.
The truth? It’s far from it.
In their current state, decentralized solutions are doing great, but not great enough to serve the masses. Yes, the adoption is rising, as it should, but we’re far away from the point where the UI and UX of these platforms are smooth and easy enough for the layman to use daily.
Self-custody is a great solution. But currently, it is more of a responsibility than an average Joe would want to bear. That’s the reason most users still prefer centralized exchanges.
So, when we talk about lessons from 2022 that we want to take into 2023, we’ll try and steer clear of any maximalist reasoning.
1. Transparency Trumps All
If we really look close enough, we’ll find, the one major reason we need decentralization is that it promises transparency. Or, to be more precise, no central entity controls what information we can or can’t see. Everything happens in public.
In a lot of cases (NOT ALL), if we can enforce PROVABLE transparency into centralized operations, we won’t particularly need ultimate decentralization of every fabric within that system.
That is to say, yes, most failed projects in 2022 were centralized. But the complete problem didn’t stem from centralization. It was actually the lack of transparency caused because those in control chose to operate in a shady manner.
If only there was better transparency….
After the fall of FTX, most major centralized crypto companies have already started working on being more transparent by publishing proof-of-reserve to tell their users that their assets are secure.
It’s still a work in progress, but it’s definitely a better short to mid-term solution instead of pro-crypto users asking everyone to go full self-custody.
Centralized crypto entities managing people’s money are definitely going to have a hard time making sure they operate transparently. But that only makes things safer for end users. So, why not?
2. Yield Doesn’t Yield Itself
A cliche is a cliche because it has been tested through time.
So, we’ll start with one: if something feels too good to be true, it probably is.
For context, consider the 20% yield of Terra-Luna. Or Celsius which offered an 18% yield. Or the numerous other projects that offered insanely high yields and later pulled the plug.
Like we said, the yield doesn’t yield itself.
There has to be some finite source for it. What is it? That’s your question to ask every time you look at such investments and think, let’s go in.
Be more cautious in 2023. There were no free meals. There aren’t going to be this year or the next either.
3. Regulations Aren’t That Bad After All
2022 bankruptcies made many people realize that benign pro-decentralization doesn’t mean we don’t need regulations.
Good for us.
Hundreds of billions of dollars were lost in crypto in 2022. Livelihoods… shattered. At the end of every bridge that burned down in the last 12 months, there were people.
And these people now seek justice. Or have already lost hope to get it.
The reason? We didn’t have strong, binding regulations that overlooked the operations of the entities that crashed or defrauded investors. As a result, there is little any legal entity can do to help the investors.
What we assume is, regulations, if done right, can uplift the industry instead of stifling innovation.
4. Simplicity Before Self-Custody
We’ve already made an argument why instantly asking everyone to self-custody their assets isn’t the smartest move. However, we’re not against self-custody.
In fact, people who can manage to keep their funds in self-custody wallets definitely should. It is, by all means, a better alternative than to have all your funds stashed in a centralized platform. But not everyone is ready for that.
So, in 2023, the aim should be to simplify decentralized products and create easy-to-use self-custody solutions.
However, there’s a lot more work to be done in terms of simplifying things to the extent that if our parents want to use Web3, they can use it without much help from us.
One upcoming solution to look up to is smart contract wallets made possible using account abstraction.
5. Decentralized Solutions will Flourish
Once again, while we’re not decentralization maximalists, we do believe that decentralization has so much to prove in the coming years. The bankruptcies and crashes of 2022 only made it clearer to the world why we need decentralization in the first place
So, even though centralized and decentralized solutions will likely co-exist in the future, people will always have easy access to decentralized alternatives of almost every kind of service.
Building Ships for Severe Winters
Now that the Titanic has struck the iceberg, the ship is already down 1/3rd, and we’re hanging on to floating doors like Rose and Jack, we need to evaluate the options we have.
One is to wait for the other ships (projects) in the ocean to onboard us and take us through the storm. For that, we can look up to Bitcoin, Ethereum, and the like.
The other, more long-term option, is to build better ships ready for severe crypto winters.
And it shouldn’t be that difficult for builders to see why they need to build Web3 projects that promise better potential.
Throughout the last bull cycle, we saw terrible projects raise millions of dollars simply because they used words like “decentralized,” “permissionless,” and “peer-to-peer.”
Times have changed. Investments have slowed down. Investors have learned their lessons.
It’s going to be far more difficult to raise funds for NFTs that look stupid and do nothing. Or DeFi projects that look different but do the same thing all over again.
What’s good for serious builders is that there’s less noise to deal with. And a lot of good information to focus on, study, research, and find gaps to fill.
If we compare this with the patterns from the last bear cycle, we can say that this bear cycle too will bring about many interesting, innovative projects that go beyond the fluff that we usually see during bull markets.
There are definitely still going to be baseless promises, shallow projects, and people looking to make money off of retail investors.
But, would we still trust every random project with a big promise as much as we did in the last bull cycle?
You tell me.