Dear friend and supporter,
Bitcoin down 64%. Ethereum down 67%. Nasdaq barely better, at 34% lower. FTX filed for bankruptcy. And so 2022 ends on a much different note than it began: when interest rates were near zero, and crypto and US equities enjoyed all-time highs. We have seen algorithmic stablecoins (read more here) collapse, hedge funds and lenders go bust, and supposed tier-1 exchanges implode. Many are asking: is it over for crypto after this annus horribilis?
Before we address that question, let’s review 2022’s events. In the first two months, LUNA and dollar-pegged TerraUSD (UST) stablecoin grew into their own DEFI ecosystem – one with an aggregate market value of $60bn – fueled by protocols offering above market yields, such as Anchor Protocol paying 20% per annum on UST. Then in May, investors lost confidence in UST once it surpassed LUNA’s market capitalization – to recall, 1 UST was redeemable for 1 USD worth of LUNA – sending its price under 50 cents within hours and ultimately imploding the whole Terra ecosystem.
The Terra ecosystem’s collapse was just the first domino to fall, with effects rippling across the entire crypto market. Three Arrows Capital (3AC), a USD 10bn hedge fund with large positions in LUNA, was the first player to file for bankruptcy shortly afterward. Liquidations of 3AC positions in Ethereum and other cryptos then triggered further selling pressure at both centralized and decentralized exchanges. While decentralized exchanges such as dYdX and Uniswap continued to operate smoothly, centralized ones began to break down. Fueled by greed, crypto exchange Celsius had lent significant customer monies to 3AC (USD 75m) and Arkham Intelligence (USD 500m). Write-offs on those loans, due to 3AC’s failure, together with losses on crypto positions and clients withdrawing funds, combined to force Celsius to file for bankruptcy. Meanwhile other centralized exchanges, such as Voyager and BlockFi, also filed for bankruptcy. By far the most spectacular collapse was FTX, the second-largest centralized crypto exchange, which had sent billions of customer funds to Alameda, an affiliated trading firm, to cover their own losses. FTX subsequently declared bankruptcy in November. As 2022 comes to a close, each of these centralized crypto firms lies in ruins, leaving over 100,000 creditors unlikely to recoup more than a small fraction of their deposits.
However, we don’t think this is, in fact, the end for crypto. Noting how the largest failures were centralized entities, the case for decentralized protocols has never been stronger. We have seen decentralized finance (read more here) shine, with leveraged positions liquidated smoothly, and trades executed and settled instantly. But it was also the moment Layer 2 scaling solutions (read more here), such as Arbitrum and StarkNet, showcased how the Ethereum ecosystem is scalable, by processing thousands of transactions in minutes – Arbitrum processed over half a million transactions on 8 November, and at low cost.
Still, for crypto to gain mainstream adoption, centralized and regulated gateways will be required for fiat on- and off-ramps. While we’ve already seen some progress on that front from MoonPay, offering fiat on-ramp services on Uniswap since 20 December, we expect similar integrations from even larger financial companies in 2023 – you can read Visa’s plans for auto-payments from self-custodied wallets here. In addition to DEFI, we also expect further adoption across the many use cases that NFTs offer (read more here). The list of traditional companies offering an NFT in 2022 is a long one, with big brands such as Adidas, Puma, Nike, Gucci, B&O and Rimowa leading the pack. But don’t expect only consumer brands to launch NFTs in 2023 – we’ll also see an uptick in music and art NFT launches from famous artists. Facebook has already positioned itself for such a move, allowing Instagram users in the US to mint and collect NFTs, using Polygon, since early November. Crypto is here to stay and the Web 3.0 movement too large to ignore.
Thank you for your trust and all the best for 2023!
DeepTech Ventures Team