Crypto Price Pain Will Lead To Better Projects Going Forward
The recent meltdown at Terra, subsequent questioning and doubting of the decentralized finance (DeFi) space in general, and the dramatic drop-off in cryptoasset prices has led some to dub this era the next “crypto winter.” On the surface such a description is correct, with hundreds of billions in value having been wiped off the cryptoasset market in the recent sell-off. That said, and despite the surface level similarities to the crypto winter that existed during 2018-2019, there are several traits that differentiate current market volatility from an existential crisis of confidence.
From a higher level perspective the recent price declines and volatility that the cryptoasset sector is experiencing should not strike market participants as a dramatic surprise. Rising alongside higher risk assets such a tech stocks and emerging market debt instruments, cryptoassets have experienced a dramatic increase in value since mid-2020. Even as global uncertainty and geo-political conflict continued to rise across the board, cryptoassets of all stripes thrived. Entirely new applications – including decentralized finance and non-fungible tokens – burst into mainstream conversation and attracted billions in investments.
Countries adopted bitcoin as legal tender, and over 100 nations have researched, developed, or launched a central bank digital currency (CBDC). Every trend and market commentator seemed to indicate that crypto was destined to dominate and supersede fiat currencies in virtually every marketplace. As has been proven time and again, however, there is no such thing as a sure thing; the current price volatility and declines have reinforced this reality. With uncertainty, however, there is also room for improvement.
Let’s take a look at a few of the reasons while price declines cause short term pain, they also can pave the way future improvements.
Crypto declines lead to operational improvement. Following previous declines (and the predicted end of crypto), there have consistently been marked improvements to how the cryptoasset ecosystem operates. Several examples come to mind, including the improvements made to centralized exchanges after the failure of Mt. Gox (among others), and the increased rules around reporting after the 2018-2019 declines in bitcoin and other crypto prices. In addition the rise of decentralized autonomous organizations (DAOs), which themselves were reputationally damaged following the 2016 DAO hack, have also led to better regulatory frameworks around how blockchain based organizations can become integrated within the wider business landscape.
Following the collapse of the Terra stablecoin there are increased conversations around the need for improved reporting, transparency, and reporting requirements; these are issues that need to be raised for stablecoins to continue developing. As painful as the findings may be, and the damage that certain specific projects will suffer as a result, greater transparency and standardization will be a positive development for stablecoins.