5 Lessons From 2022 That Forever Altered Cryptography

5 Lessons From 2022 That Forever Altered Cryptography Posted On
Posted By

For many people attracted to cryptocurrencies by the possibility of replacing an exclusionary, extractive, and obsolete global financial system, the failure in crypto markets over the past year has been a bitter disappointment.

To be clear, technology failure did not cause most investors to lose money.

In the case of the Bitcoin blockchain, none of the drama of the past year is relevant. It adds a block of transactions to its continuously expanding ledger every 10 minutes, 24 hours a day. It serves as a reminder that the global, decentralized networks of computers running Bitcoin, Ethereum, and other permissionless blockchain protocols continue to forge systems for an intermediary. A free value exchange with which no individual or organization can interfere, regardless of market fluctuations. The presence and persistence of these enormous autonomous robots never cease to amaze me.

However, “crypto” encompasses more than just protocols, smart contracts, and cryptography. It is also the human community that has gathered around this combination of technology. Technology can only permeate the world with this community and promote positive change. Unfortunately, their efforts contributed to the failures of 2022. While a few individuals deserve the lion’s share of the blame, there is also widespread collective accountability. The theft, fraud, and egregious breach of trust occurred on our watch.

If we are to draw lessons from the wealth destruction of 2022, we cannot conclude that Sam Bankman-Fried and his ilk are solely to blame. SBF deserves the prison term he will likely receive upon extradition to the United States. Still, the real question is how to construct a system. Not just a technology system but one of rules and norms – that makes it far more difficult for individuals like him to commit their crimes.

Constructing this system in 2023 and beyond will require considerable effort. But it begins with 2022’s teachings.

Here are the five I believe to be the most crucial in Cryptocurrency

Cryptocurrency does not exist in a monetary vacuum.

It’s easy to forget that cryptocurrency markets suffered significantly greater losses in the first few months of the year. Not due to a crypto-endemic scandal but rather because the Federal Reserve was increasing interest rates. It halted the global influx of excess funds into speculative assets, such as cryptocurrency. The macro environment is significant.

Excessive leverage inevitably results in contagion.

The domino effect, which occurs when the failure of one cryptocurrency institution rapidly spreads to others, is not unprecedented. It was present during the Asian financial crisis of 1997, the Long-Term Capital Management collapse of 1998, the subprime mortgage crisis of 2008, and numerous other similar events in financial history. They all shared the same characteristics: an unduly optimistic outlook on the increasing trend of financial assets drove an excessive accumulation of speculative loans. When these beliefs were shown to be false, everyone ran for the exits, revealing a network of creditors and debtors who helped each other fall.

DeFi is resilient, but ongoing economic and technological audits are required.

Most high-profile failures in 2022, including FTX, Celsius Network, Voyager Digital, Three Arrows Capital, and Genesis, featured custody-holding CeFi firms that put consumer cash at risk. It has energized DeFi proponents, who correctly point out the most resilient decentralized market-making and exchange systems. They have survived because they lack a trusted mediator capable of such exploitation. Digital Currency Group, the parent firm of CoinDesk, owns genesis.

However, in October, Chainalysis projected that DeFi investors had lost a record $3 billion due to smart contract breaches and rug pulls by founders. DeFi is a place that is wild, turbulent, perplexing, and unpredictable. To attain widespread adoption, it requires a more comprehensive audit mechanism. Where credible independent analysts or bounty-hunting developers evaluate the code security, founder practices, and tokenomics of blockchain initiatives.

Back to basics: “number go up” cannot sustain cryptography.

Suppose we remove the layers of interlocking protocols and the explanations for the returns they promised. If that’s the case, all we can do is guess for the sake of guessing. It was mostly the result of momentum trading or the anticipation that prices would rise. It is time to return to fundamentals and seek utility in the real world. Token returns must reference real-world use cases, such as cross-border payments, decentralized energy, new marketing models enabled by non-fungible tokens (NFTs), or other intriguing use cases.

Cryptography requires a knowledgeable, impartial, and hard-hitting press.

The year 2022 established conclusively that this business needs a powerful “Fourth Estate” to hold the individuals and organizations working inside it accountable. Permissionless blockchains should be seen as public goods, like the air we breathe, the water we drink, and the roads we drive on.

They must be safeguarded as such, which necessitates transparency (balanced with respect for individual privacy). While we are all immensely happy with the role CoinDesk played in exposing the FTX house of cards, it begs the question of why this was discovered later. There need to be more crypto-savvy, professionally managed, and editorially independent journalists covering this business.

Even though it was an investigative piece by Ian Allison that sparked the FTX disaster, some people still credit social media crowdsourcing with revealing the scandal. A trained journalist working within the structure of a professionally run newsroom, whose editors and management have carved out a position of independence from their proprietor to earn the trust of their readers.

This industry can’t thrive if allegations of misbehavior like the ones in 2022 constantly catch it off guard. It necessitates attention concerning transparency and the realization that journalists investigating concerns at key institutions are serving the industry’s long-term interests rather than damaging them.

Related Post