The cryptocurrency business experienced difficulties in the year 2022. The FTX group crash, Terra’s failure of the UST stablecoin, 3AC’s bankruptcy, along with a lessening in cryptocurrency value of USD two trillion triggered the “Crypt Winter” of 2022-2023. It’s intriguing to note that cryptocurrencies were viewed as a solution to issues like these in conventional finance after the 2008 economic crisis. They attempted to eliminate issues like transaction control, information inequality and conflict of interest. If you are starting on crypto trading and looking for a reliable trading platform, consider visiting chainwizard-ai.org, which offers a range of features and services.
In a recent analysis, we make the point that despite the perception that cryptography might do away with old financial problems, in just fifteen years, it has created a vulnerability to them. Numerous elements of traditional finance have been inspired by the financialization of cryptocurrencies, including the development of sizable crypto middlemen referred to as “SICIs,” which is contrary to the idea of decentralized finance. A crypto environment that is considerably more central compared to traditional finance because of the presence of intermediaries like FTX lacks the usual amount of regulation as well as supervision present in regular exchanges.
The World of Cryptocurrency
DeFi facilitates direct, one-on-one transactions with no intermediaries. Smart contracts automatically manage transactions, and token holders and nodes share an equivalent entitlement to data and decision-making. A DAO is one variation of this system, and DEXs are trading platforms controlled by a DAO. However centralized intermediaries still exist in the cryptocurrency area.
FTX: A Crypto Parallel to the Lehman Moment
One of the main cryptocurrency exchanges, worth USD 32 billion in 2021, FTX, ran into issues at the start of 2022. Binance voiced concerns about FTX’s links to Alameda and the main token it has, FTT. Lack of finances was the beginning of FTX’s troubles, which evolved into something comparable to Lehman Brothers’ 2008 predicament. Despite the standard cause in finance, which doesn’t entail public distrust, FTX was harmed by Binance’s uncertainty. Traditional finance adds funds externally when cash is limited. FTX encountered financial difficulties because of this.
In the cryptosphere, trust was meant to originate from the technology itself instead of via regulations as well as influence. In the beginning, cryptocurrencies were traded on decentralized exchanges to stay away from financial troubles. Now, though, we wonder if this design was flawed. In conventional finance, crisis management and crisis prevention are handled via regulations and adjustments.
Turning Crypto Financial and the Emergence of Vital Crypto Middlemen
SICIs, or large or well-connected crypto middlemen, introduce risks of their own by concentrating on crypto operations. This occurs when a single intermediary, frequently in charge of a well-liked token, rises to great influence and takes over the majority of transactions. These SICIs were created since they are necessary for all cryptocurrency transactions. It is comparable to significant shadow banks or other opaque, non-bank financial organizations.
DeFi’s theories are at odds with how things are concentrated in the crypto world. Eliminating middlemen who controlled exchanges in several locations were meant with cryptocurrency. It sought to develop conditions which were fair, durable and palatable via technology and trust. Nevertheless, in many DeFi instances, a small group still exert considerable influence on decisions and how everything is done.
The issue is that cryptocurrency middlemen behave as financial institutions but lack customary protections like rules, insurance, and help from central banks. Despite their intended purpose of preventing trust and money issues, these regulations do not apply to crypto. FTX was confronted with a bank run scenario when Binance raised concerns regarding its links with Alameda, FTT along with other financial institutions. This caused a financial issue because individuals left quickly. FTX could not cope with them with no crypto solutions to stop them. The DeFi proposal on cryptography didn’t go as planned.