The recent cryptocurrency bear market has eradicated both Decentralized Finance (DeFi) and Centralized Finance (CeFi) projects in the crypto space. But past performance is not always indicative of future results. First, the price of Ethereum has recovered 48% over the past few days ahead of the upcoming Merge upgrade.
At the annual Ethereum community conference in Paris, Cointelegraph spoke with Skale Labs co-founder Konstantin Kladko about the market crisis. Sklae Labs is a decentralized blockchain network built on Ethereum. Currently, it consists of 28 blockchains, one of which can seamlessly send tokens from one chain to another. Here’s what Clado had to say about the latest contagion:
“The market behaves this way because there is no regulation. Almost all the bad things that happened on Wall Street 100 years ago [during the 1929 Wall Street Crash] It’s happening now on the blockchain. Unfortunately, while the big players have the opportunity to quietly leave when the market is underperforming, it is often too late for the smaller players. “
As the bear market unraveled, it turned out that projects that were once well-known in the blockchain space, such as Celsius and Three Arrows Capital, were actually leveraging massive amounts of leverage on client deposits to generate seemingly safe and consistent returns. They were forced into liquidation and insolvency of creditors, estimated to be worth billions of dollars, before sending the industry downhill.
Kladko explained that while so-called “decentralized safeguards” are in place to protect investors, they often fail under duress. “Most DeFi applications have negligible protection against crashes. An example of this is in DeFi lending where you should pledge X amount of collateral, take out Y amount of loan, and there will be no liquidation until the price of the collateral rises The danger goes down to Z. The problem is that when the collateral price goes down to Z, it usually goes down so fast that you won’t be able to sell.
Market participants exacerbated the problem by taking out digital asset loans to buy more volatile assets and then forcibly liquidating them at prices well below the theoretical liquidation price (due to the speed of the sell-off), leading to a DeFi “super crash.” As for the impact , for a decentralized industry, neither path forward looks particularly attractive. As Kladko explains:
“If such market issues continue, regulators such as the SEC may eventually intervene. They may introduce rules that make cryptocurrency trading difficult. Or there may be higher levels of self-regulation, such as administrative Institutions monitor DeFi developments in the same way that medical associations monitor doctors and bar associations monitor lawyers.”
But while Kladko advocates for stronger regulation to protect investors, he sees the ongoing cryptocurrency bear market as more benign. “It doesn’t feel like crypto winter,” Kladko said. “It’s true that some wildly speculative companies and outright Ponzi schemes went bust, but for now, things look like they’re going to improve. First, the Ethereum merger could actually be the main catalyst for the next few years. So hopefully, there will be Less speculation, more growth of mature and meaningful projects.