Massive Crypto Liquidations On The Rise! Is Web3 Dead?

November 10, 2022November 11, 2022

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Recent crypto liquidations are massive and peaking up! $854,000,000 in liquidations rock Bitcoin and crypto markets as FTX token (FTT) collapses 86% on 8th November. It’s kinda of Lehman Brothers moment in crypto.

During one of the toughest years for technology in more than a decade, the web3/crypto segment is suffering the worst. Inevitably, this crash will evoke disillusionment in the technology & the space.

Crypto Liquidations On The Rise… Crypto Winter Has Arrived!

Earlier this week, FTX, a top crypto exchange became insolvent. Recently valued at $24b, FTX is the third major crypto company to collapse in 2022 due to insolvency: Three Arrows Capital & Terra complete the trio.

Here is what Sam Bankman says about recent liquidations on @SBF_FTX.

In these three cases, each used cryptocurrency as collateral. When the collateral’s value disintegrated, the business defaulted. FTX’s trading arm, Alameda, borrowed against FTX’s token called FTT. Terra used their currency Luna to maintain a peg for their stablecoin UST. Three Arrows borrowed against their crypto holdings to invest in Luna & defaulted on their loans when Luna crashed in value.

This is Alameda & FTX’s portfolio. The fallout from their collapse will be acute.

In addition, hackers have stolen more than $2.3b of assets from projects year-to-date.

The rotten cherry atop this mud pie: across the top 100 crypto projects, the typical token has lost 75% of its value since January. May be we are about to trade to new lows as everyone wonders which crypto household name will go bankrupt next for lending money to FTX / Alameda.

Bitcoin wicked down to almost $17,500 on BitMEX’s XBTUSD perpetual swap. On various other spot exchanges, Bitcoin experienced similar falls to levels close to $17,000. Get ready for lower for longer, because it’s coming. But the good thing about crypto is that no central bank will be riding the rescue with freshly printed fiat shitcoins to bolster the balance sheets of reckless companies. The crypto industry will be forced to devour its humble pie quickly — leading to a speedy recovery that leaves it stronger than ever.

Beyond crypto liquidations, don’t underestimate DeFi contagion: Many DeFi assets & protocols will be affected by FTX’s collapse. Look out for ⦿ Low MCAP assets w/ high TVL on FTX ⦿ Protocols & DAOs w/ funds stored on FTX ⦿ Institutional De-Risking affecting LPs ⦿ Unstable Stables.

Beware Institutional Lending: There are many companies we know have FTX exposure.

Genesis
Wintermute
CoinShares
MultiCoin
AmberGroup
Liquid Meta

Some of these companies were taking large uncollateralized loans in DeFi. Protocols offering institutional loans include Maple,TrueFi, and Atlendis. Hopefully all loans will be repaid, but consider the risks temporarily increased.

We’re nowhere near understanding the extent of FTX contagion. It took over two months for 3AC et al to fail after the LUNA collapse. We’re in for a bumpy next few months. So, here are things crypto investors need to consider in the next few days / weeks.

It’s Crypto Winter, So Is Web3 Dead, Then?

The above crypto liquidations are rough stats. But broad rejection of web3’s progress is as myopic as unmitigated zealotry for its innovations.

Carlota Perez’s Technological Revolutions & Financial Capital lends some perspective on this crypto winter. Both Ben Thompson & Jerry Neumann have great overviews of the book.

In short, technology advances progress through an installation phase when frenzy for an innovation drives speculative investment, with periods punctuated by rapture & collapse. Then the deployment period takes place when more sustainable businesses take root.

Web3 remains in the installation phase when a technology exists & the promise of many new businesses outshines the reality. These cycles take 50 years & we’re about a decade into web3.

The aftershocks of these three foundation-shaking earthquakes in crypto will include regulatory oversight, weaker investor interest, & broader skepticism which are healthy.

Protecting consumer dollars with regulation reinforces credibility in financial institutions. Fewer dollars in the ecosystem will focus builders on viable business models. Investors will value these companies based on revenues.

We’ve been here before. “All of the money poured into tech companies in the first half decade of the Internet Era created an infrastructure and economic foundation that would allow the internet to mature.” The dotcom bubble created several multi-trillion dollar companies twenty years later.

That gloom will continue to cast over the ecosystem until a founding team figures out a way to assemble decentralized databases, tokenomics, wallets, & NFTs into a product that changes the world.

Parting Thoughts…

Is innocence in crypto is disappearing? To successfully leverage this transformational technology across financial services, we need to collectively do a few things:

Focus on sustainable business models that deliver meaningful business and customer value for users.
Use portfolio allocation to manage risk: As a rule of thumb, protocol or ecosystem exposures should be limited to 5-10% of your portfolio. A 5% loss sucks, but a 50% loss is devastating. 5-10% per CEX, protocol, chain, etc. protects from practically all major vulnerabilities.
Need of additional responsible stewards to help thoughtfully lead the future in the space, including those who understand risk management, credit risk, collateral, custody, balance sheet management, and the raft of financial services operating principles that have protected customer’s deposits and enabled banks to issue credit and manage risk for decades. The only way blockchain will become mainstream is if traditional financial participants use the technology for business value – this is where the assets, knowledge and customer relationships are.
Establishing appropriate and thoughtful regulatory guidance in this space – these are assets of value for businesses and consumers. Digital money representing fiat that is natively issued on blockchain is very important for financial services activities to successfully move onto blockchain, and in our view this should be led by banks. Provenance Blockchain has USDF – bank minted tokenized deposits that enables banks to support this transformation, leveraging the strength and depth their balance sheets, customer relationships and regulatory frameworks, including AML/KYC.
POR is coming: To build consumer confidence, many CEXs will be implementing Proof-of-Reserves (POR). POR uses on-chain data to prove CEXs’ assets & liabilities. CEXs w/ POR will be less able to hide bad debt from consumers. Expect. @nansen_ai & @DefiLlama to lead this charge. POR may expose more skeletons: CEXs avoiding POR will be targets for bad-debt rumors. Moreover, CEXs that have legitimate bad debt may be exposed as a result. It’s also possible that CEXs will front-run being exposed by halting withdrawals. Be prepared for more CEXs to fail.
“Not your keys, not your coins” Until POR, consider non-custodial wallets.

The centralized exchanges will always face these issues of mistrust on behalf of their customers. FTX was not the first high-profile exchange to fail and it won’t be the last. But throughout all this, blocks on the Bitcoin, Ethereum, and all other blockchains were still produced and verified. Decentralized money/finance and web3 have and will continue to survive and thrive in the face of the failures of centralized entities (which are for sure to be regulated more!!).

Long Live Web3!

Recommended Reading: Tokemak: Answer to the DeFi Liquidity Black Hole