This week, the crypto market fell for the second time in a month, alongside a sharp decline in global stock markets. The collapse, which is not the first of its kind, showed again how violent fluctuations in a largely unregulated market distort the development of transformative technology. But crypto is just one aspect of the larger blockchain universe. Its skeptics and fans must learn to see it as a technological experiment, instead of just a blatant scam or a speculative path to riches.
Why did the market crash so dramatically?
The first recent crash, when the cryptocurrency market plunged 36% in a week in May, offers a clue. The collapse was largely triggered by the death spiral of a cryptocurrency system called Terra Luna, which consists of the Luna coin and its associated stablecoin, TerraUSD. At its dizzying heights in the spring, it represented around 3% of the total crypto market. Fear spread through the exchanges, and with it came panic selling.
After the second crash this week, the cryptocurrency market is still worth nearly $1 trillion in total (about a third of last November’s peak). Only a few of the 19,000 cryptocurrencies created since 2009 are now worth billions. Most have failed. The crypto market is extremely volatile not because of the underlying cryptocurrency technology, but because of the tight and often dangerously unstable junction between emerging technologies and ordinary money. From the perspective of the market’s long-term history, this instability is not new at all.
In the late 1990s and early 2000s, internet stocks were a race on foot, just like crypto is now. Back then, too, peddling was rampant, the atmosphere was like that of a casino, and almost any idea preceded by an “e” – no matter how reckless or silly – attracted the attention of investors and investors. media. Seemingly every day, fortunes were being made and lost in spectacular fashion.
But even as Napster, Webvan and eToys died out, a revolution was underway. Despite all the shenanigans going on in the casino, real and lasting businesses, publications and communities have been created and have thrived online. The internet has survived, more or less.
Terraform Labs, the company behind TerraUSD and Luna, was founded in 2018 by Do Kwon, a computer scientist and entrepreneur in South Korea. Mr Kwon, now 30, is a notoriously brazen hustler who has made waves for calling his critics ‘poor’ and ‘cockroaches’. But despite his lack of polish and early warnings from developers and analysts about technical weaknesses in his plans, he managed to raise $200 million in venture capital from 2018 to 2021. His company boasted that it had reached a elusive goal in crypto, namely, the establishment of a truly “decentralized” stablecoin.
Stablecoins, which serve as a sort of bridge between crypto and regular money, have until now required large amounts of old-fashioned real-world collateral to operate, contrary to the crypto’s original goal of eliminate dependence on legacy financial systems. Terra Luna was an algorithmic stablecoin system in which “stability” was supposed to be guaranteed by mathematical mechanisms and incentives. Like those early high-flying internet stocks, these also proved vulnerable when trust failed.
In the 2000s, the alchemists of secured debt turned junk securities into AAA gold through the mathematical magic of “bundling”. The murky math behind algorithmic stablecoin systems like Terra Luna gave off the same captivating and mysterious vibe. But as more and more borrowers defaulted, collateral bonds and other exotic derivatives – what Warren Buffett once called “the financial weapons of mass destruction” – collapsed, contributing to the 2008 global financial crisis. Echoes of the destructive power of derivatives can be heard in the story of the equally exotic Terra Luna.
Such a risk can only go unnoticed for some time. The sad thing is that when risk suddenly becomes apparent, it takes real people’s money and often good promising projects with it. Or even entire economies: losses in the 2008 crash were estimated at over $10 trillion in the US alone, a sum that dwarfs the most destructive swings in crypto to date.
As Terra Luna’s death spiral accelerated, its followers, known as “Lunatics”, wavered between terror and hope as Mr Kwon funneled more than $1 billion in Bitcoin into the system in an attempt to restore stability. “Deploy more capital – stable guys,” he tweeted.
But in the end, there wasn’t enough money coming in to offset the outflow, just like in an ordinary bank run, and this particular experiment in replacing trust with math was coming to an end. Among the thousands of failed crypto experiments, Terra Luna stands out as one of the largest, taking with it around $60 billion in total market value.
Vehement opponents of crypto were quick to celebrate the death of the blockchain, insisting that all crypto is fraudulent. These critics are a mirror image of the equally unrealistic cheerleaders at the opposite end of the spectrum: the pro-crypto libertarians who demand a financial world without any regulation.
Responsible crypto market players have been calling for and helping to develop sensible regulatory frameworks for many years. A foundation of cryptographic regulations already exists; In the United States, federal agencies such as the Financial Crimes Enforcement Network, the Securities and Exchange Commission and the Commodity Futures Trading Commission began weighing in on separate aspects of trade and taxation in 2013. In October, the Department of Justice announced the formation of the National Cryptocurrency Enforcement Team. The list of crypto scammers who have gone to jail already far exceeds the number of bankers imprisoned in the United States for their role in the 2008 financial crisis.
In the early days of the internet, the circus atmosphere made it easy to ignore the dangers that were brewing – surveillance capitalism and illegal government espionage among them – and that would have serious global consequences. Over time, regulations have been put in place: privacy frameworks, such as certain provisions of the Gramm-Leach-Bliley Act of 1999 in the United States and the General Data Protection Regulation of 2016 in Europe, and speech protections like Section 230 of the Communications Decency Act.
At the same time, the marvels of the Internet have multiplied, magic that now seems commonplace: a map of the world, street by street, in your pocket; instant translations from almost any language; a research service for each branch of knowledge; near-instant world news. Today’s Internet is deeply embedded in the world’s economies, media, politics, industry and social life, in good and bad ways.
A similar development is underway for crypto. Blockchain, the technology that makes cryptocurrency possible, has the potential to be just as transformative as the internet innovations we depend on every day, and industries like supply chain management, finance and pharma. have already begun to find uses for it.
It is possible to imagine a future where you could seek the fate of every tax dollar you paid, and government corruption becomes virtually impossible; where beautiful and important stories, music, games and art would never disappear from the internet; where, instead of being forced to depend on a big power company, you could buy and sell excess solar power from or to your own neighbors, and never face another outage. Wherever independent and tamper-proof record keeping is needed, blockchain could keep all receipts available and safe for all to see.
But to make a world like this possible, crypto must be responsibly integrated into the existing global economy. Regulators, media and market players must be on the same page to balance the benefits of innovation against the need to prevent harm, and naked greed must be harshly reprimanded, not encouraged.
For many, the possibility of huge profits is the most exciting thing about crypto – it’s a gold rush in which anyone can suddenly become rich beyond their dreams. But the unfortunate get-rich-quick mentality that has too long been associated with entrepreneurship, in crypto and elsewhere, must end.
After all, just as most people keep working whether the stock market is booming or crashing, the practical, real work of developing blockchain technology will continue, regardless of market histrionics.
The New York Times
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