New Year 2023 replace 2022 on the sea beach concept. — Photo

Farewell to 2022… Hello 2023!

2022 was a year of monkey NFTs, terrible pictures of rocks being sold for $400,000, and a domino-like collapse of some of the biggest firms in crypto. It witnessed the dashing of the hopes and dreams of BTC loyalists who called for the price to hit $100k given their infallible plan to get rich simply by HODLing, while the DeFI crowd got their time in the sun… and was shown to be heliophobic.

Well, they say hindsight is 20/20, so let’s look at what happened this year…

Axie Infinity Ronin bridge hacked

  • March 2022
  • 173,600 ETH stolen
  • $600m stolen

The crown of NFT games of 2022 was the Pokemon clone Axie Infinity, which had a tokenization model more complex than Amway. To go into how its economy was on paper would be to write a paper on its own, but all we need to know here was that right when the cracks started to show in it’s game economy (when it started to become obvious that the rich only get richer and the poor get exploited) they got hacked.

The reasons given? The lack of a suitably decentralized network.

The hacker gained access to 5 of 9 of the validators for the system, then basically stole funds by falsifying withdrawals.

Takeaway Point: this would not have been possible with a Proof of Work system, because simply stealing access to nodes on a PoW doesn’t mean you can steal funds without also paying the constant continual cost of maintaining the work (via a 51% attack). Which is effectively paying for the electricity costs (about US$12 million a day) while also putting at risk the mining revenue earned (US$14 million a day1) for building on a chain which contained invalid falsified transactions that stole people’s money. Even if executed, a heist of $600 million would be a race against time to launder the funds before the cost of constantly maintaining an invalid blockchain would eat away at all the gains. And this ignores the fact that in order to launder the booty, the hackers would have to move coins on the network, the same network which many legitimate users would not recognize as valid due to the hack, and therefore, as long as there was one mining node which maintained the legitimate chain, they would have a very hard time moving the funds due to lack of liquidity.

Terra Luna

  • May 7, 2022
  • Over $2 billion in TerraUSD (UST) was unstaked and liquidated.
  • UST fell from $1 to $0.91 which caused a rush to trade $0.90 UST for LUNA.

This caused the stablecoin to de-peg and flood the market with more LUNA due to the algorithm of the stable coin (a system which was ill-conceived from the onset due to the fact that it remained stable only as long as there isn’t a mass loss of confidence in LUNA/UST, which would cause a systematic guaranteed collapse of both).

Do Kwon, founder of LUNA attempted a rehabilitation plan for LUNA, which failed to restore market confidence in the project. Shortly after, Do Kwon doubled down on the original algorithmic monstrosity with another financial perpetual motion machine, LUNA 2.0, which also collapsed in a spectacular fashion. Investors lost $60 billion dollars due to panic selling.

Takeaway Point: The fact that all of these crypto schemes are often mired in complex algorithms and math are just smoke and mirrors made to confuse and confound the average retail investor. At their core they all depend on just one thing: collective market confidence. Without the majority confidence of the average fool, they all collapse under their own weight, which reveals their true nature as just confidence schemes… aka cons.

3AC crypto hedge fund

  • July 1, 2022
  • Bankrupt, owes creditors $3 billion
  • Owes Digital Currency Group, the largest and oldest of the crypto VC groups, $2.36 billion

At a peak valuation of $560 million, the crypto hedge fund had invested in several distressed projects, including Axie Infinity, and BlockFi. With the LUNA collapse, the market started waking up to the truth behind DeFI projects and started pulling their money out of toxic crypto markets in droves. This caused a flood of margin calls from many of 3AC lenders, which they lacked the funds to meet. Because the founders never showed up at court, the bankruptcy proceedings went ahead without them, and while the U.S. bankruptcy court currently has outstanding subpoenas on the founders, they are still at large.

Takeaway Point: The Terra collapse was one that was bound to happen, when a Rube Goldberg machine is introduced into a market flush with money that they can’t get rid of fast enough. But given the interconnectedness of the market, the collapse of one large project in crypto is bound to trigger subsequent collapses in the funding companies that supported them. This was the case for 3AC, a supposed “crypto hedge fund” which was really just a couple of guys who were riding on the “rising tide floats all boats” principle for investments. With the cocaine powered crypto investment rush that started in 2017, it seemed that the easiest way to make money was just gather as much investment as you muster, and throw it at whatever was the next big craze in the crypto-media—for 3AC that was DeFI, and one of the biggest shining stars of ‘magic money printing’ gig was LUNA/Terra and the lending/yield market.

Voyager crypto investments

  • Bankrupt July 5, 2022
  • Owes $1-$10 billion in liabilities to over 100,000 creditors.

The next domino to fall was Voyager, who, after 3AC defaulted on a $650 million unsecured loan, was left exposed and without their customer funds. Customers had been depositing with Voyager with the expectation of upwards of 20% in interest earnings. Voyager shut down trading once it was clear that 3AC would not be repaying the loan. The hot-debt potato was now passed from 3AC to Voyager, and it would be Voyager’s customers who seemed they would be holding the bag. Interesting, at this point, FTX, as a knight-in-shining-armour gesture, provided Voyager a $500m line-of-credit in order to help with the spiralling market.

Takeaway Point: The contagion of an over-leveraged bubble economy starts to be obvious when you have companies all collectively scratching each other’s back. Voyager was pressured to deliver on ever increasing expectations of return that the market was demanding. When faced with the harsh reality that providing evermore unrealistic returns would require them to take bigger and riskier bets with their customers deposits, or just wind down their business quietly, unfortunately many crypto companies decide they would rather go out with a bang than fall behind their competition.

Celsius crypto lending platform (DeFI)

  • July 13, 2022
  • Bankrupt, liabilities over $1.2 billion dollars deficit

Mid July then saw the contagion pass to crypto lender Celsius. As with all of these platforms they had their own token, which proxied as a security and funding mechanism for their company. With the downturn in crypto markets, Celsius saw a mass exodus from their platform, which left them with more liabilities than the their capabilities to service them. The panic left saw the value of their token crash 70% in a couple hours, never to recover. They filed for bankruptcy on July 13, 2022.

FTX crypto trading exchange

This one goes without saying, and any treatment of FTX deserves it’s own article, but basically due to the hack which stole $600 million from FTX wallets (strange how that number keeps moving from company to company), and a lack of liquidity and account mismanagement they filed for bankruptcy on November 11, 2022. Sam-Bankman-Fried is out on $250 million bail and awaiting trial in the U.S. for numerous charges including wire fraud, and conspiracy to defraud investors.

BlockFi crypto financial services

Trading exchange and crypto custodial provider BlockFi, filed for bankruptcy on November 28, 2022, with liabilities ranging up to $10 billion, including $275 million of debt to FTX’s Sam-Bankman-Fried personally. They were forced to close up shop due to liquidity issues. They had accepted $400 million from FTX in order to weather the liquidity crisis following the collapse of confidence following the TerraUSD fiasco.

Takeaway point: When the tide goes out, that is when we find out who on the beach had not been wearing any swimsuits the whole time. If an industry is in the middle of a bubble, one tried and true way to test which of the companies are actually sound is to drain out all the liquidity from the system, and see which companies survive. A healthy company can respond to a dry up of liquidity simply by cutting staff and operational costs associated with the reduced client flows. The unhealthy ones which have lent out excessive amounts of their clients money in search of higher returns will be bankrupted.

And that was just the companies in the ‘crypto-finance’ space. 

2022 also saw a rash of crypto-influencers who delved into promoting their own Ponzi schemes (some while at the same time proclaiming the evils of Ponzi schemes!) fall out of grace, while other more conservative voices have started to enjoy an increase in popularity.

2022 in summary

While there are still some big elephants in the room which have yet to show their colours, the best lesson of 2022 is that the market sentiment in general has been ‘wisened up’ to the antics, grifts and general hijinks of the crypto establishment. What this hopefully means is that the funding will be slower to come, and a bit wiser to boot. This should help to foster a new breed of companies and projects in the coming year which are a bit more conservative and less exuberant. It is the hope that this change of sentiment will see the ecosystem evolving to one centered around digital assets, practical applications and utility, from the one of ‘crypto,’ financial services and products catering only to speculative gains.

I for one, am really excited for what 2023 will bring to the world of digital assets and digital transformation!

Wall Street Technologist

[1] With some assumptions given the total hash rate of SHA256 platforms such as BSV

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