What a year makes a difference. Twelve months ago, I published a 2021 appraisal of crypto that focused on NFT art, with blockchain artist and pioneer Rhea Myers arguing that “the creativity on all levels is the highest I’ve ever seen .” Bitcoin and Ether were worth more than three times what they are now. Sam Bankman-Fried was recently anointed “the world’s richest 29-year-old” by Forbes.
Since then, crypto has embarked on a long and brutal downfall in terms of market value and public perception. After the collapse of the Bankman-Fried FTX crypto exchange, many people now consider the technology almost synonymous with scams. The saga threatens to mettle even the most devoted members of the space. NFT trading volume is a fifth of what it was at the end of last December, and about $2 trillion – that’s with a “T” – has been lost from the crypto market since it reached nearly $3 trillion.
But it’s far too early to write a short crypto story: the industry has bounced back from some major slumps in the past. As the calendar changes, a sluggish bear market is likely to stretch for months. But many people in the space are working on tools to improve transparency to prevent future collapse; regarding regulation that protects consumers and allows them to access crypto around the world; and on financial projects that do not promise too much reward.
The hyper-financialization and heavy emphasis on “the number going up” (crypto parlance for insurmountable financial growth) didn’t hurt the space in 2022. Next year, it’s time to try a different approach.
Here are some of the biggest lessons the crypto world (hopefully) learned in 2022, to take into the new year.
If a deal seems too good to be true, it probably is
Get-rich-quick schemes in crypto became successful at the beginning of the year. In particular, many companies offered financial products with much higher interest rates than you would get at a traditional bank. Celsius, a leading lender, offered yields of up to 18%. Anchor, a program that was part of the Terra-Luna ecosystem, offered 20%. Although these markets were dubious, their creators—Alex Mashinsky of Celsius and Do Kwon of Terra-Luna—bragged that they had unlocked mechanisms that were better and smarter than their predecessors.
Perhaps unsurprisingly, these schemes quickly collapsed when the market turned downward. Celsius filed for bankruptcy in July with more than 100,000 creditors – many of them individual customers. He basically quit the Terra-Luna ecosystem, and Do Kwon is wanted by the South Korean police.
While many questioned the sustainability of Celsius and Anchor during their rise, those criticisms were often dismissed as “FUD:” shorthand for the needless “fear, uncertainty, doubt” of crypto skeptics. All too often, legitimate criticism is dismissed as “FUD” by crypto-optimists, who prefer to believe that their wealth will always rise even when strong evidence points the other way.
Decentralization can be a liability
Decentralization is a fundamental principle of crypto: the idea that no government, bank or individual actor should be able to control or manipulate it. Crypto leadership should be spread, Ethereum founder Vitalik Buterin explained to me in February. “Leadership positions are not fixed, so if leaders stop functioning, the world forgets them,” he said. “And the opposite is that it’s very easy for new leaders to rise up.”
Read more: Vitalik Buterin is worried about the Future of Crypto
But in 2022, crypto centralization came shockingly, precisely because there were no gatekeepers or regulators to stop new leaders from accumulating wealth and power. Three leaders in particular—Do Kwon, Su Zhu of Three Arrows Capital, and Bankman-Fried—have created success through social media charisma, sparkly financial products and a fierce growth mindset. Each earned widespread trust early in the year, and their projects were so central to the crypto ecosystem that they seemed too big to fail. But they failed.
When Kwon’s Terra-Luna ecosystem collapsed, a vicious contagion hit the crypto markets, in turn taking down Su Zhu’s Three Arrows Capital and then Bankman-Fried’s FTX. Crypto was thought to be about the code, not the people – but three men were able to gain enough power to wipe out a trillion worth.
A similar problem affected OCTs (decentralized autonomous organizations), an organizational structure that was supposed to be fairer to members. But because voting in those organizations was often based on the number of properties you owned, a study in July found that less than 1% of major holders held 90% of the voting power across some major OCTs .
Self-regulation has failed to stop scams
The main enemy of Crypto in America this year was the Chairman of the Securities and Exchange Commission (SEC) Gary Gensler, who used his power to fight various crypto projects. Many crypto insiders believed that the industry should exist outside the purview of the SEC, and that the blockchain would allow them to effectively self-regulate.
But crypto communities also failed to sniff out bad actors in their midst before it was too late. First of all, the investors of the decentralized finance (DeFi) project Wonderland did not notice for months that its co-founder was Michael Patryn, a long-time scammer who led the Canadian crypto exchange who defrauded customers of $190 million.
Sam Bankman-Fried amassed unprecedented power and popularity without anyone in crypto (or outside of it) bothering to check if anything he said was true. While it’s true that Bankman-Fried’s downfall was caused by insiders – including crypto news outlet Coindesk and then Bankman-Fried’s rival Binance Changpeng Zhao – these revelations came too late for a million customers and investors FTX at least.
Catching crypto criminals is getting easier
Billions of crypto dollars have been swiped in scams this year, according to blockchain analytics firms like Chainalsysis. But while thieves have thrived on the blockchain by exploiting bridges between chains and persuading users to hand over their private keys, it’s also been clear that its transparent nature has helped the police tracking. The Department of Justice and other law enforcement agencies have become more active and capable in tracking stolen money by tracking information trails across the blockchain. In February, the DOJ traced $3.6 billion in Bitcoin stolen in 2016.
Last month, journalist Andy Greenberg published the book Tracers in the Dark: The Global Hunt for Cryptocurrency Crime Lords, which reveals the increasingly sophisticated techniques used by investigators to track down crypto criminals. “It took me ten years to realize how unattainable Bitcoin really is,” Greenberg told me in an interview. “Cryptocurrency tracking was not only possible, but an incredibly powerful investigative technique. And in the hands of a small group of detectives, one massive cybercrime operation after another was busted, each one bigger than the last.”
Crypto prices are increasingly tied to mainstream markets
Crypto idealists want to believe that Bitcoin and Ethereum work outside of the traditional financial systems, and that cryptocurrencies are anti-inflation. This has been proven false in 2022: the prices of those currencies have begun to move in tandem with larger markets such as the S&P 500.
Crypto has certainly provided a way of life for investors in countries with radically unstable currencies, like Venezuela. Crypto was also crucial for quick fundraising and money transfers in Ukraine during the Russian invasion. But just as the stock market has tanked, with tech stocks in particular doing poorly, so has crypto.
Read more: This is why Bitcoin and Other Cryptocurrencies Keep Crashing
The Ethereum merger was a rare bright spot
Amid all the bad news, there was a bright spot for the crypto community: Ethereum completed its transition from Proof of Work to Proof of Stake after years of preparation. The move reduced Ethereum’s energy usage by more than 99.9%, according to estimates, and was made possible by a team of developers working together around the world. The merger sets the stage for Ethereum to become faster, cheaper and more secure.
Read more: Why Ethereum Mergers Matter
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