Lex Sokolin is the chief economist at a leading blockchain company Consensus,
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To say that the cryptocurrency market has been on a rollercoaster ride is an understatement. In January 2021, barely nine years after trading began, the total value of the cryptocurrency market is set to reach $1 trillion (USD) – the fastest asset by many standards to reach this milestone. Ten months later, on November 10, 2021, the asset class nearly tripled to $2.9 trillion as many coins hit all-time highs.
Rock and Pixel regularly sell in the millions, profile pictures are on Twitter The lasers abounded in the eyes, and the excitement knew no bounds.
However, just a month later, the market cap plummeted by -21% to $2.3 trillion. By mid-June 2022, the entire market segment had collapsed to a market capitalization of $800 billion, more than -70% from its all-time high.
Takeaway? The crypto winter is here, much of the excitement has evaporated thanks to anguish and distraction.
With apologies to Mark Twain, reports web3His death has been presented in a big way. We’ve been down this volatile path in 2011, 2013 and 2018, only to bounce back. But the question is not so much if, but when, that there will be light at the end of the tunnel.
Lessons from the crypto winter
An important takeaway from this latest bull run is that the hyperbolic narrative and the urge for high returns created “greed” among investors. While it is often thought to be associated with retail investors, this cycle showed that even the most blue-blooded investment firms were engaging in dangerous and unhealthy behavior.
Second, it became clear that in the Web3 ecosystem, many of the prevailing token design principles needed to be corrected. For example, tokens that rely on the continuous growth of the network to increase value have been found to be desirable, and improved governance is needed as a core objective function of the token.
Token holders need and deserve more.
Furthermore, investors need to understand that crypto has yet to live up to the narrative of being an alternative asset class, as it is closely correlated with traditional asset classes. For example, the crypto market cap grew until federal Reserve ,irrigated) kept rates close to zero, similar to equities. However, valuations began to drop as soon as the Federal Reserve telegraphed its intention to raise interest rates.
One last failing is that many protocols within the space were being built to operate as money “Legos”, yielding a rather shaky result for a real-world use case. As a result, these types of protocols, especially within decentralized finance (DeFi), have been fragmented. A protocol must have a function to sustain use and drive development over time.
Despite highly stressed market conditions and depressed prices, DeFi protocols (eg, Come on, mixtureAnd MakerDAO) remained flexible while maintaining their loan-to-value. These protocols lent investors were protected by smart contracts that automatically forced borrowers to repay their loans. This is not to say that DeFi protocols are 100% secure, but the risk parameters to protect investors worked as they should, at least for the top lending protocols. Furthermore, each of these examples had a clear and valuable function, and users were drawn to them for a specific purpose.
The most important lesson is that despite the winds of winter hitting the Web3 streets, there’s no sign that developer activity or fascination for Web3 has slowed.
Ethereum (ETH) remains one of the strongest ecosystems for developer talent and has renewed that trust by shipping”the merge“The most important upgrade in blockchain history. Solana (SOL) And universe (atomic) Ecosystems are also gaining incredible traction. Competition remains fierce for developer talent like the new Layer-A ecosystem aptos emerging.
when will winter end
Of course, no one has a crystal ball as to how long the crypto winter will last. While it is impossible to predict the future, we can draw insights from past cycles and current developments to guide the next wave of enthusiasm.
As mentioned earlier, the Web3 market is closely tied to traditional market cycles. Therefore, as the Fed and other central banks continue with an accommodative monetary policy in response to the current economic environment around the world, it is safe to assume that depressed prices will continue.
However, once stability sets in and there is a reverse trajectory of the three important factors driving asset prices – growth, inflation and policy – we can expect an upward trajectory.
Also, there needs to be a complete solution to all the contagion TeraUSD And luna fall downas well as any questionable risk management decisions associated with it, such as three arrows capital (3AC), CelsiusAnd Sailor, Several technicals are currently indicating seller exhaustion, but we may continue to see new bottoms without these critical issues being resolved.
[Editor’s note: the article was written before the collapse of the FTX crypto exchange.]
What’s next for crypto
It is inevitable that sooner or later, will have wide acceptance blockchain Technology Is Driving Block Space Demand and Driving the Next Wave of Users Adoption,
Risk management in DeFi is still at an early stage of development compared to traditional finance. I expect “naïve” risk management tools to be developed on top of the primitive layer of DeFi protocols.
Leading protocols in DeFi will continue to undergo iterations to keep up with market forces and remain relevant.
Those that are fundamental to the ecosystem will have important attributes such as technological innovation, high security, and trust as demonstrated by the amount of capital locked up by them. smart contract,
DeFi protocols will develop their own multi-chain strategy or rely heavily on platforms that further interconnect crypto markets across all chains to create open finance and novel approaches to help strengthen their balance sheets and token value. Let’s look for
Diversified revenue sources will be important to keep up with dynamic market cycles.
For example, Aave’s recently approved crypto-backed stablecoin would earn interest for its treasury, allowing it to continue funding future projects, a strategy other protocols may follow.
Crypto winters serve as a reminder that volatility is part and parcel of financial markets. Given Web3’s larger vision, it’s wise to proceed with caution. The aftermath of the dot-com bubble confirmed that innovative organizations and technologies weathered the storms. Same story will happen with web3.
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learn more:
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