FTX is the latest in a series of crypto companies to come undone this year, including Three Arrows Capital, Celsius Network and Voyager Digital. People have been asking me what these collapses mean for Decentralized Finance. Is it the end? The events have prompted the movement of capital into self-custody, which sets up the market nicely for a mass entry into the DeFi space. There are challenges to overcome, but we are addressing them head-on.
FTX is the latest in a series of crypto companies to come undone this year, including Three Arrows Capital, Celsius Network and Voyager Digital. People have been asking me what these collapses mean for Decentralized Finance. Is it the end?
In some ways, we are witnessing an ending that echoes the financial crash of 2008, where a system that was flawed and subject to individual abuse of power was exposed as a house of cards. The FTX story is about arrogance and carelessness, a familiar theme in the crypto industry, and one that characterizes an era we all hope is coming to an end.
Just as Satoshi’s whitepaper and the creation of Bitcoin arose out of the 2008 failure, so can we expect to see the emergence of radically different mechanisms following the crypto business failures. But first, there’s a mess to be cleaned up. The evolution will follow some predictable stages:
Stage 1: Movement of capital: Withdrawal of assets from centralized exchanges. According to multiple sources, there has been a mass exodus of capital from all CEXs. Bloomberg reported over five billion dollars of withdrawals in the first week after the news hit. What’s interesting about this is that the actual tokens were moved into self-custody – they were not converted into fiat. This indicates a lack of confidence in centralized exchanges rather than a lack of confidence in the cryptocurrencies.
Stage 2: Engagement in low risk protocols: Protocols that provide an interest payment on digital assets saw an increase in capital, or TVL (total value locked). Aave increased its capital by 70%, and many platforms such as Curve, dYdX and others almost doubled their user base.
Stage 3: Increase in DEX participation: We’ve seen the very beginning of this trend – the volume and number of transactions on protocols like PancakeSwap have increased sharply already – but there’s more to come. Over the coming months, the capital that was previously kept on custodial exchanges will be deployed to other strategies, including liquidity pool farming.
While prices of cryptocurrencies have fallen as a result of the news, a greater impact on the industry comes from the movement of capital into self-custody, which sets up the market nicely for a mass entry into the DeFi space.
There are headwinds to navigate as part of the shift towards decentralized protocols, and just how long it will take remains an open question. DeFi tools report notoriously inaccurate data in almost every case, and this creates a complex system to navigate for any asset manager or trader.
At FLUIDEFI, we’re providing real-time DeFi data that is 100% accurate so that our customers can navigate the space with confidence and knowledge, mitigating their risk and providing a roadmap for sound strategies.
Lisa Loud, CEO & Co-founder, FLUIDEFI