How 2022 differs from 2018
Don’t miss CoinDesk’s Consensus 2022, the must-attend crypto and blockchain festival experience of the year in Austin, TX, June 9-12.
I have been here before.
Probably, you have been here before. But if not, don’t worry, you’ll be back.
It’s in the nature of things.
CoinDesk columnist Lex Sokolin is co-global head of fintech at ConsenSys, a blockchain software company based in Brooklyn, New York.
Yes, crypto markets have meme lords, trolls, psyops, internet culture, and Ape non-fungible tokens (NFTs). There have always been flags and stories, narratives and uniforms. Our Web3 voice and uniforms are special and unique, just like the suits and ties Wall Street wore on Black Monday in 1987, just like the t-shirts from the early days of the Internet when America went online.
But even if creative destruction brings tragedy into people’s lives, there are things to see and learn. Everyone, and I mean everyone, is going to create stories and reasons for what happened, and what it means, including me.
The call for regulation will – of course – become louder than ever as stablecoins, shadow banks and leveraged hedge funds wipe out the consumer. The call for reconstruction will intensify, largely from people seeking to deploy sidelined capital. Some will emphasize Austrian economics and personal responsibility and dig politically.
Read more: Crypto Market Crash Leads to $1 Billion in Liquidations
Then we will calm down, get bored, forget and repeat things. The person is a cell, and the crowd is a super organism. Each can do little to resist the corpus of which it is a part. And there is no evidence that we should resist. No Luddite has been right in the face of ongoing technological change that is reshaping the nature of human society. But maybe they were happy about it.
A bright side
If you want a silver lining – and I do – this is the place to look. Is there creativity and innovation amidst the swirling chaos of capital loss? Is it just recursive financial engineering, or is there an underlying operating economy and progress in the architecture of the world?
This is where we can see the big difference between now and the initial coin offering (ICO) crash of 2018, because you’ve been there before too. Then large sums of money were raised for starter pitch decks. Billions have been collected for promises of things written on paper and never actually built or used. It was a collapse of the idea space, catalyzed by regulatory pressure on the token fundraising mechanism.
Fundraising isn’t the real thing – it’s more of a liability for your investors before you build. Also, there was very little in terms of Web3 economy. Ideas of how to organize into Decentralized Autonomous Organizations (DAOs) or experiments with NFTs existed, but no one was making a living like artists can this time around.
I rather remember my time in 2008 at Lehman Brothers. We had seen Bear Stearns fall apart and be sold at a rummage sale, and we had watched who would be next. Lehmmann? Morgan Stanley? Today the names are different. Celsius? Capital of the Three Arrows (3AC)? Or rewind some more. Long-term capital management? Lehman went bankrupt when its counterparties refused to lend to it due to perceptions of its overleveraged and underwater balance sheet. It was a sacrifice to the god of moral hazard. Each investment bank was sitting on the same exposure.
Innovation lives on
The 2022 crypto downturn looks less like a failure to deliver on the promise of innovative technology, and more like traditional financial deleveraging in an asset class. The words people use, like “bank run” or “insolvent,” are the same words you would apply to a functional but overheated financial sector.
Read more: FUD or facts? Terra, Celsius Show the value of asking questions
Additionally, crypto is much more correlated and integrated with the overall macro economy, so the fallout from the Fed’s rate hike, creating a risky environment and depressing tech and crypto valuations, will be felt. happen in a way that wouldn’t happen in 2018. We arrived in the institutional world, anon.
I’m certainly not saying that Web3 works flawlessly or is fully integrated. Rather, I am pointing to a systemic financial crisis that has global economic structural causes. Yes, there are bad faith actors who engage in “rug pulling” and scams, and there are hackers and thieves who break into the equivalent of digital banks. The price crash exposes their scam, and in the long run, their names will be of no importance other than examples to mark a bustle in a chart.
However, the machines and robots we build in Web3 work even if their total number of locked values (TVL) melts. This was not the case for Lehman, Enron and other centralized entities, whose bankruptcy proceedings and liquidations took years and years to unfold.
Companies, people and DAOs that survive these financial shifts are changing their mental models. Treasury bills should not be kept entirely in a proprietary token. Risk management is more important when everyone is ecstatic. Valuation multiples are not fundamentals. Leverage accelerates rates of change in both directions. These things are easy to say, but hard to do. Fortunately, we have no choice but to adapt because we are there.
Read more: What Layer 1 protocols need to learn from the telecom crash