The past six months have been nothing short of a financial soap opera for the cryptocurrency market, with more drama unfolding seemingly every other day. At this point, since the beginning of May, an increasing number of major crypto entities are collapsing like dominoes, with the trend likely to continue in the near term.
The contagion, for lack of a better word, was triggered by the collapse of the Terra ecosystem in May, in which the digital currencies associated with the project became worthless almost overnight. Following the event, crypto lending platform Celsius faces bankruptcy. Then Zipmex, a Singapore-based cryptocurrency exchange, frozen all customer withdrawalsa move that was mirrored by crypto financial services provider Babel Finance late last month.
It should be noted that since December 2021, nearly $2 trillion has been wiped from the digital asset industry. And, while markets across the board – including equities and commodities – have been severely impacted by the current macro climate, the aforementioned series of meltdowns certainly had a part to play in the ongoing crypto drain. . At this point, Ben Caselin, head of research and strategy for crypto exchange AAX, told Cointelegraph:
“Contagion has played an important role in the recent downturn, but we cannot ignore general market conditions and the change in fiscal policy as important factors playing on prices. The situation with Celsius, Three Arrows Capital but also Terra is an expression of an overleveraged system unable to withstand severe market stress, and that should at least serve as a wake-up call for the industry.
He went on to add that increasing the mass adoption of digital currencies in the future should be done by expanding the reach of crypto beyond its “sound money narrative.” Caselin emphasized that the market as a whole must now consider and implement sound and sustainable long-term financial practices.
What do the recent insolvencies mean for the industry?
Felix Xu, CEO of decentralized finance (DeFi) project Bella Protocol and co-founder of ZX Squared Capital, told Cointelegraph that the past month has been something of a “Lehman moment” for the crypto market. For the first time in history, this industry witnessed the insolvency of major asset managers such as Celsius, Voyager and Babel Finance within months.
According to his personal research data, while troubled projects like Voyager and Genesis collapsed due to having the most exposure to Three Arrows Capital (3AC), the collapse of 3AC, Celsius and Babel Finance has emanated due to rogue management practices associated with their users’ assets. Xu added:
“I believe the first wave of forced liquidation and panic selling is now over. As asset managers and funds file bankruptcy declarations, their crypto collateral will take a long time to liquidate. On the other hand, DeFi lending platforms such as MakerDAO, Aave, and Compound Finance have performed well during this downturn as they are over-collateralized with strict liquidation rules written into their smart contracts.
Going forward, he believes the crypto market is likely to move in correlation with other asset classes, including stocks, with the sector potentially taking some time to rebuild lost investor confidence. That said, in Xu’s view, what happened last month with the crypto market is nothing new when it comes to the traditional financial space. “We saw it in the financial crisis of 2008 and the Asian financial crisis of 1997,” he pointed out.
Hatu Sheikh, co-founder of DAO Maker – a provider of growth technologies for nascent and growing crypto startups – told Cointelegraph that the consequences of this contagion have been strongly negative, but not for the reason that many people would imagine. :
“A key loss here is that many of the centralized financial platforms that went bankrupt due to contagion were active gateways to the industry. Their unsustainable and often misleading means of attracting new industry participants have caused millions of people to go deep into non-fungible and DeFi tokens.
In Sheikh’s view, while DeFi integration may stall or at least slow down in the short term, many venture capitalists operating in his space have already raised billions and are therefore able to continue injecting. funds in many upcoming startups. “We will have a new slate of companies that will replace those that have lost the role of being an industry on-ramp,” he said.
Indisputable damage to the reputation of the market
Misha Lederman, director of communications for peer-to-peer and self-custodied decentralized crypto wallet Klever, told Cointelegraph that the recent crash has definitely damaged the reputation of the industry, but believes the aforementioned insolvencies have helped. to cleanse the industry of bad players, add:
“This presents a huge opportunity for blockchain platforms and crypto communities with an accountability-driven approach to innovation, in which user funds are protected at all costs. As an industry, we need to be better than the fiduciary debt system we aim to replace.
A similar opinion is shared by Shyla Bashyr, head of PR and communications for UpLift DAO – a permissionless and decentralized platform for token sales and exchanges – who told Cointelegraph that the industry has been hit hard. and is currently surrounded by more negativity than ever before.
However, she believes such scenarios are sometimes necessary because they provide new opportunities to create transparent products that provide additional assurance, coverage and security for people’s investments.
Sheikh pointed out that while there is widespread criticism that DeFi apps have lost billions, it should be noted that the losses accrued by CeFi lenders are significantly higher:
“The fact remains that DeFi’s notable blue chips have remained mostly unscathed, but CeFi’s losses come from industry leaders. However, as the CeFi crypto is a stepping stone in people’s journey to DeFi, industry adoption will be heavily affected in the short term.
He concluded that the “CeFi contagion” could eventually prove to be a powerful catalyst for the growth of its decentralized counterpart as well as a validation of the primary use case for crypto, such as being self-sovereign wealth.
The future may not be so bad
Asked what lies ahead for the crypto market, Narek Gevorgyan, CEO of CoinStats, told Cointelegraph that despite the current conditions, the market has already started to show promising signs of recovery, stating that institutional investors are back on track. the playing field and exchange flows. are on the rise.
In this regard, banking titan Citigroup recently published a report indicating that the slide of the market is now in recession, with the researchers noting that the “acute deleveraging phase” that was recently in play is over, especially since a large majority of the large brokers and market makers in the sector came forward and disclosed their exposures.
Not only that, but the study also shows that outflows from stablecoins have been stemmed while outflows from crypto exchange-traded funds have also stabilized.
Gevorgyan believes that the confidence that investors had built up over the past two years has dissolved somewhat due to recent events. Nonetheless, the blockchain community is still better funded than at any point in its short history, with development very likely to continue. He then added:
“The Terra implosion triggered a meltdown that led to the downfall of several CeDeFi platforms. The community has become more aware of the shortcomings of the CeDeFi model. Overall, the series of insolvencies has given the market cryptography a chance to start fresh as DeFi2 and Web3 continue to grow in importance, perhaps the Metaverse will take center stage in this new setup.
CeFi versus DeFi
Sheikh believes that the best of CeFi has lost more than the worst of DeFi, pointing out that Bitcoin (BTC) remained one of the most liquid assets in the world. In his view, the next wave of retail adopters will have blatant references to the problem of leapfrogging self-custody, paving the way for greater focus on decentralized applications, especially as the market continues to mature.
On the other hand, Bashyr sees flourishing from now many protected projects such as insurance protocols and covered products. According to her, Decentralized Autonomous Organizations (DAOs) will become more important and functional, providing real governance and allowing users to participate in instrumental decisions by voting on proposals that make a difference.
Finally, in Xu’s opinion, the insolvencies have led millions of users to call for regulations such as those governing traditional finance within the global crypto economy to increase transparency on the investment of cryptocurrencies. user assets. Xu added that since DeFi does not benefit from any single point of control while offering full transparency and autonomous rules, it will eventually take over the crypto asset management business.
Therefore, as we head into a future plagued by economic uncertainty, it will be interesting to see how the future of the crypto market unfolds. Indeed, more and more people continue to look for ways to preserve their wealth – thanks, in large part, to looming recession fears – and so see crypto as their way out of the madness. .