Crypto Winter Sheds Illusions of Decentralization
Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.
Since May, the crypto market has suffered a series of major setbacks to its once flourishing ecosystem. Shaken in their confidence, even the most high profile figures within the crypto circles have taken a hiatus from social media to take some time for reflection. The widely held belief is that we have moved beyond a bear market and entered into a “crypto winter.” At the heart of the winter vortex sits three major companies: Terra, Three Arrows Capital, and Voyager Digital. A variety of well researched pieces from Bloomberg, CNBC, and Forbes explains the series of events that resulted in the major market fluctuations that have been witnessed over the past few months. While many compare it to the 2008 financial crisis that resulted in a recession, the analogy is still loose and this crypto winter is on nowhere near as grand a scale; it did however bring to light a few important topics, namely the need for regulation and the question on whether crypto institutions were truly decentralized.
In the face of a series of high profile hacks and bankruptcy of DeFi platforms, a recent Bloomberg podcast episode opened up the discussion surrounding decentralization and the mantra within the community that ‘code is law.’ The risk and occurrences of hacks are, in accordance with ‘code is law,’ an unfortunate event that is a byproduct of its own making. When someone finds a weakness in a chain protocol and is able to redirect funds to their own wallet, this is conventionally referred to as theft, but in the crypto world, the assets belong to the party that exploited the weakness by essentially rewriting the code. This point could be argued both ways, as theft and as fair play, but there is a certain level of hypocrisy that ensues when companies and individuals seek the aid of authorities to both police and regulate an industry that has conflated its independence from centralized authority and transparency as being the primary draws.
There have been no illusions regarding these topics among the pioneers of cryptocurrency, however as the ecosystem increased the amount of commercial players, the demographics and habits of both platforms and consumers in the crypto community shifted. These new consumers entered into the market with limited comprehension of the untamed ecosystem of decentralized finance and blockchain protocol. Understanding that hacks, insider trading, and predatory lending were crimes in the conventional finance world proved to be altogether different in the crypto world, where blockchain was touted as nearly impossible to hack and finance was decentralized and transparent.
When the series of dominos began to fall in May, beginning with Terra and driven further by the troubles with Three Arrows and Voyager, it became painfully evident that platforms who once claimed to be decentralized were experiencing a crisis of liquidity from overleveraged positions, were now behaving like centralized institutions by preventing customers from withdrawals and access to their assets. The desperate attempt to hide the questionably legal activity these institutions committed was only further scandalized by their ask of aid from the community to patch up a mortal wound. Despite the reluctance to engage with government authority, these companies now find themselves in a myriad of court battles across the globe and it begs the question on whether decentralized finance is an imaginary concept in the way it’s been executed.
Many concepts are still under development in this fledgling ecosystem, but avoidance of centralized authority and regulation is perhaps both the spark and extinguisher of the industry if not properly pursued. With more legislation being introduced and reviewed in all major developed countries regarding decentralized finance and crypto platforms, the time and space for maneuvering is quickly closing and some hard truths must be learned and addressed.