Since the start of 2022, the crypto markets have gone down from the $3 trillion mark — which was recorded in November 2021 — to $2.2 trillion in January last year, to roughly $800 billion at the start of 2023.
These unfavorable conditions have triggered a bearish atmosphere surrounding all decentralized finance (DeFi)-related sectors, including play-to-earn (P2E) games and decentralized autonomous organizations (DAOs). The non-fungible token (NFT) industry was not spared in the onslaught, as several NFT projects initially worth millions of dollars declined to near-zero values.
Despite the damaging effects of the past fiascos, several market watchers have reason to believe that these events were necessary to purge out weak projects, leaving the strong to thrive in an industry already plagued by attacks from regulatory agencies and governments alike.
The Terra collapse
One of the most referenced debacles of last year was the Terra Collapse that happened in May and precipitated a wave of insolvency crises into the crypto scene, leading to the implosion of a crypto lender Celsius Network and hedge fund Three Arrows Capital.
The fall of the Terra ecosystem was majorly triggered by the depegging of TerraUSD (UST) in early May.
UST price action. Source: CoinStats
Terraform Labs had taken out $150 million worth of UST from a decentralized exchange 3pool on May 7, looking to meet liquidity demands on other exchanges. However, two traders, who looked to exploit a vulnerability witnessed, swapped 185M UST for USDC on 3pool, destabilizing TerraUSD’s peg in the process.
Terraform Labs had to take out another 100 million UST from 3pool in an attempt to balance UST’s ratio to other stablecoins on the exchange, but the damage had already been done.
All subsequent moves aimed at re-pegging the uncollateralized algorithmic stablecoin proved futile, leading to a cascade of failures that eventually impacted the entire ecosystem as market-wide selloffs ensued, triggered by investors’ dread.
The aftereffects of the Terra implosion were catastrophic at best.
One of crypto’s largest hedge funds with $10B under asset management, Three Arrows Capital (3AC) fell a month later, partly due to massive exposure to Terra. According to founders Su Zhu and Kyle Davies, the hedge fund lost $500 million in the Terra collapse. The 3AC collapse led to liquidity issues for several entities within the scene, including Babel Finance, Voyager, and BlockFi. These entities were revealed to have been substantially exposed to 3AC.
The FTX implosion
Following a market-wide crash in May, the crypto scene staged a minor comeback that recovered some of the losses of the previous months, but the sudden FTX implosion in November sealed the bear’s hold over the markets.
Bitcoin (BTC), Ethereum (ETH), and other assets plummeted to record lows amid a prevalent capitulation phase. Investors’ confidence in centralized exchanges declined.
The FTX saga began with a CoinDesk article about the firm’s liquidity.
Binance founder and CEO Changpeng Zhao (CZ) announced on Nov. 6 that the exchange would be liquidating all its FTT token holdings as a result of reports suggesting insolvency issues. This led to a sharp decline in FTT’s value, leading to selloffs and a mass withdrawal of funds from FTX, as investors feared it was the next crypto entity to implode.
The bank run eventually exposed FTX’s liquidity crisis. FTX founder and CEO Sam Bankman-Fried (SBF) had to reach out to CZ for a bailout from Binance. Binance had agreed to bail out FTX on Nov. 8, announcing it would purchase the trading platform, but CZ noted that the exchange could pull out of the deal at any time. Binance eventually did pull out following a due diligence process on FTX’s sheets.
This raised greater concerns about just how bad the FTX situation is.
Following a series of damning revelations, FTX eventually filed for Chapter 11 bankruptcy at a US Bankruptcy Court on Nov. 11, with SBF stepping down as CEO. Attorney John J. Ray took charge to handle the company’s bankruptcy proceedings.
Several entities were affected by the FTX collapse due to significant exposures to the exchange. Some of these include BlockFi which paused withdrawals on Nov. 11, and Galois Capital with a $100 million exposure to FTX, Galaxy Digital, CoinShares, Nexo and several others.
More recently, crypto lender and Digital Currency Group subsidiary Genesis paused withdrawals on Nov. 16, citing the impact of the FTX collapse. Genesis’ move affected the crypto exchange Gemini and its Earn program, as the exchange revealed a $900 million exposure to Gemini.
Crypto hacks
Amid the debacles, liquidity crises, and the collapse of the crypto markets, the cryptocurrency industry also experienced numerous hacks in 2022.
The top 10 hacks in the industry resulted in losses to the tune of $2.1 billion. Notably, the largest crypto hack in 2022 was the Ronin Bridge hack in March, which saw a loss of $612 million.
Amid the FTX saga, the company suffered an exploit that saw the hackers move $477 million from the platform. Reports suggest the hack was an inside job. Additionally, the Wormhole Bridge and the Nomad token bridge were separately hacked for $321 million and $190 million, respectively.
Furthermore, market maker Wintermute was exploited last September and lost $160 million. A month later, a BNB Chain bridge was hacked for $100 million.
Crypto, DeFi, and NFTs in 2023
Several market observers believe the broader cryptocurrency scene will blossom in 2023 after going through one of its toughest phases in history last year. Others believe the past predicaments are necessary for the sanitation of the crypto scene, and the purge is likely to spill into 2023.
“2021 was a boom year for crypto, DeFi, and NFTs. 2022 was a bummer year. 2023 will be the year that the market and regulators clear out the riffraff,” said David Lesperance, an attorney with 30 years of experience and managing director at Lesperance & Associates.
Source : [DeFi might have bright future in 2023 while NFTs need to prove their value, experts say](crypto.news/defi-might-have-bright-future-in-2023-while-nfts-need-to-prove-their-value-experts-say/) by Wahid Pessarlay - FTX 2022 Bankman-Fried•crypto.news by Wahid Pessarlay / January 16, 2023