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Liquidated. Insolvent. Chapter 11. Bankrupt.

All words which have swirled around over the last couple of months have turned ugly in crypto land, as a wave of contagion has flooded the market (which I have previously written about here).

We have seen overleveraged players such as Celsius go under, following the original crisis (there have been too many to count now, really) triggered when Terra taught everybody what the term “death spiral” means.

But as the bankruptcies pile up – Celsius, Three Arrows Capital, Voyager Digital and so on – there is increasing rhetoric about this proving that crypto was all a waste of time.

But this is ignorant and facetious in my view. Nobody declared “payment processing is dead” when major firm Wirecard went under following accounting fraud. Enron didn’t tank the energy business. Lehman went under, but banking still exists today.

The reality is that in an industry as big as cryptocurrency had become, there were always going to be a few bad apples. Layer in the fact this space has grown at a pace rivalled only by the Internet – remember, Satoshi only launched Bitcoin in January 2009 –  and the fact that there has been froth and recklessness around the edges is to be expected.

Why tar an entire industry as a failure because of a few reckless players?

More importantly, let’s look at the seductively named decentralised finance (DeFi). With this tsunami of pain cascading across the market, DeFi has done…nothing. There have been no major meltdowns. Protocols operated as they were supposed to, as they were coded to, as everyone knew they would. And before you mention – I am not counting Terra as a decentralised finance protocol – that was a unique situation based on what was a doomed concept in an uncollaterised algorithmic stablecoin. Not to mention, it was very much run by a centralised fund (LFG) operating in a very opaque manner.

Is it really decentralised though if the LFG reserve is controlled by a group of small individuals? Who deploy their capital in mysterious and discretionary manner ?

Loans were liquidated if margin calls could not be met. Collateral was sold and lenders repaid. With everything on-chain and transparent, everything has transpired exactly how it was expected.  

I see absolutely nothing over the last few months that makes my belief in DeFi waver. Quite the contrary – it has sailed through this turbulence without a care in the world. Bear markets are for building, they say. Let’s see what DeFi can do – after all, it hasn’t even seen its third birthday yet.

If there is one positive to take from this, it is that the security of overcollaterisation borrowing and lending through DeFi protocols, and the transparency and predictability it offers, have remained stout. Sometimes boring is good, and DeFi has been boring. Great innovation and revolution take time, if DeFi is to deliver on its promise, it needs to be battle tested. These last few months have thrown up nothing it could not handle.

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