Wrapping up
While there’s plenty to be excited about in the future, there are also plenty of lessons to be learned in the present. The current crypto crises is similar to those we’ve seen play out in traditional finance. The opaqueness that centralized lenders and Three Arrows Capital operated under resulted in an inability for lenders to properly evaluate the risk of their counterparties. Lenders didn’t know how much the others had lent to 3AC, nor did they know how much leverage and risk 3AC was taking on. Investors didn’t know how much risk they were exposed to altogether. When the market moved against both the lenders and 3AC, lenders were left with massive holes in their balance sheets, and investors were left holding the bag.
However in contrast to the centralized lenders facing insolvency, it’s important to note that blue chip DeFi lenders Aave, Compound, and MakerDAO operated without a hitch. Every loan and its terms remained transparently on-chain for all to see. When collateralization levels fell below thresholds, collateral was sold via autonomous code and lenders were paid back. This same code also dictated that Celsius was forced to pay back $400M in loans to Aave, Compound, and MakerDAO — no court order needed (though overcollaterization played a role). All told, it served as a powerful proving point for decentralized finance.
That’s just to say that it may be easy to get discouraged by the current price action while forgetting just how far we’ve come in a short period. When the last bear market hit, the most popular user application was Crypto Kitties. These days, there are more profound, impactful innovations than we can count. DeFi, NFTs, a rich DAO ecosystem, all came about in the last two years, and even came together to make a real impact on the world stage. Meanwhile, layer2 scaling solutions are finally here, and can take us from the dial-up to broadband phase, capable of supporting a rich array of user applications with simple UX to boot.
As in previous downturns, detractors are once again confidently pronouncing crypto dead. However, from our seat in the industry, we’re invigorated by the brilliant founders we see working tirelessly to move this technology forward. As the entire financial system and world digitizes itself, we remain convinced that the opportunity within crypto and Web3 are far greater than most realize.
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