#44 The Good, The Bad and The Ugly in 2022
Here comes the inevitable 2022 recap, plus news about what is/isn't a security, the future of Solana, bitcoin mining and more.
The Good, The Bad and The Ugly in 2022
It’s that time of the year when every media outlet, every influencer, and every company with a blog reviews the last year and forecasts the next. We are no different (lol)
We will make it quick, to the point, and fun. Here are the highlights of 2022 and how we believe they will shape 2023, classified into three categories: the Good, the Bad, and the Ugly.
👌 The Good. Events that helped crypto make progress.
👿 The Bad. Events that broke stuff, hurt people, or made things more difficult.
🥴 The Ugly. Events that are likely to keep bringing yet a little more distress.
Without further ado and in chronological order.
We are starting in February. FED rising rates have to go in 🥴 The Ugly box. Increasing interest rates drained liquidity from the crypto market and will continue to do so in 2023
In March, crypto's role in the Ukrainian invasion must go into 👌 The Good category. Crypto funneled millions of dollars in help to Ukraine, giving the world an example of an excellent use case for a censorship-resistant, fast, efficient money transfer method. And all the fuzz about how Russian oligarchs could evade sanctions through crypto ended up educating authorities about the transparency and accountability of digital assets.
Biden’s executive order in March kicked off coordinated efforts from many government agencies. We’ve already seen some results and must choose 👌 The Good box for these.
It was May when things started to go 👿 Bad, with the boldest laboratory of algorithmic stablecoins, the Terra / Luna ecosystem, collapsed spectacularly.
Also in May, hedge fund Three Arrows Capital dropped a second bomb on the industry and started disintegrating like a dying avenger
In June, Celsius overheated (see what I did there?) and halted withdrawals. It was the beginning of the end for Celsius and another excellent example of the wrongdoing of some companies who embraced centralized finance's opacity and lack of accountability. Bad, Celsius, 👿 Bad.
Let’s stop in May / June for some more of 👌 The Good. and praise the performance of DeFi platforms amid these crises. DeFi never succumbed to the distress and continued with business as usual.
In July, the EU made significant progress in developing a solid regulatory framework for crypto. That goes to 👌 The Good.
DeFi kept exploring its frontiers. One of the most promising ones is the bridge between decentralized finance and Real World Assets. In July, MakerDAO led some of the most exciting experiments. This goes to 👌 The Good too.
In August, the US Treasury Department sanctioned mixer Tornado Cash, a bunch of smart contracts running on the blockchain, creating a weird precedent: a government agency prosecuting code. This makes it to 🥴 The Ugly list, as it embodies the lack of nuance applied to crypto and the double standards in legislation.
Before we start with the good news that also came in September, let’s segue into another piece of weird regulatory behavior: the SEC prosecuted a Coinbase employee for insider trading. This could be good, but in the complaint issued, the SEC defined nine tokens as securities, creating an unexpected regulatory precedent in the fine print of the indictment. That’s 🥴 Ugly.
September was our happy month. The Merge finally happened. Ethereum transitioned from Proof of Work to Proof of Stake, and one day we will be able to look back to 2022 and realize this was the main course of the year. 👌 The Goodest, maybe?
Some other projects brought some needed 👌 The Good. For example, zero-knowledge rollup projects suddenly emerged from the dark as the next big thing in scalability, and Cosmos set the tone for its future progress with the ATOM 2.0 whitepaper.
In October, Elon Musk took over Twitter, and I honestly don’t know how to classify this, so I’ll just go with a dog emoji 🐶. That seems appropriate
We’ve chosen to place Polygon’s mighty adoption spree in October because that was when they created an onboarding tsunami through an NFT collection on Reddit. But this Ethereum sort-of L2 has scored some of the most spectacular goals with Normieland in 2022: Starbucks, Disney, or Meta are other relevant names. 👌 The Good.
Then came November with a bag full of disappointment. The golden boy turned out to be a Bankman-Fraud, and the whole of crypto started a race through the stages of grief. Contagion is still happening today, so this moves in a grey area between 👿 The Bad and 🥴 The Ugly.
Speaking about 🥴 The Ugly face of contagion, the situation with GBTC will probably be our first concern in 2023, as Grayscale deals with debt and disappointment.
We’ve left some things outside of this list for lack of a timeframe, a single event to point to, or a clear verdict on how to evaluate it. Still, other trends like the progress made in Decentralized Social, all the debate around NFT royalties, or the situation in Binance (👌?👿?🥴?) were also exciting things happening in the space during 2022.
We asked Dall-E for an interpretation of the classic Western movie title we've used as inspiration for our 2022 yearly recap.
⬡ Six Angles
We select six topics to illustrate the different angles from which we can approach crypto. We could choose dozens, but six is the atomic number of carbon… and otherwise, we’d be writing for ages.
1. FTX | Another test for the Howey Test
It’s becoming a tradition that Gary Gensler declares a token a security on a post hoc basis. This time it is in the context of the FTX case, where the SEC is suing Sam Bankman-Fried, Caroline Ellison, and Gary Wang for securities fraud and treats FTX’s native token, FTT, as a security. The SEC’s complaint includes four pages where the Commission explains, without mentioning the name, how the FTT token ticks all the boxes of the Howey Test.
Nevertheless, we’ve recently heard some dissenting voices criticizing this 76-year-old rule of thumb. SEC Commissioner Hester Peirce (sometimes aka “crypto-mom”) has a record of suggesting improvements. And more recently, Coinbase shared an outline of regulatory recommendations (more on this below), where they propose some nuances to the Howey Test based on the unique nature of tokens vs. old-school securities. Tokens often have enhanced utility beyond just profit making, and the decentralization of projects questions the narrow concept of “the efforts of others” included in the Howey Test.
2. L1s | Solana’s uncertain future
Two emblematic collections in the Solana NFT ecosystem are abandoning ship. DeGods and y00ts, #1 and #2 by market cap are packing their things and leaving. DeGods will bridge to Ethereum after allegedly asking the Solana foundation for a $5M ransom to stay; y00ts are moving to Polygon after closing a deal with this Ethereum L2 (another success story for Polygon’s biz dev team).
Since the fall of FTX, Solana has shown extreme weakness. The token lost 2/3 of its value. Its main DEX, Serum, was pronounced dead and cloned through a hard fork by the community of developers since FTX demise revealed that Sam’s team held (and probably lost) the keys to the protocol. NFTs are leaving too.
But Solana had a unique take on blockchain technology that had nothing to do with Sam, and that could retain value if they survive this monumental crisis.
3. Bitcoin mining | Miner capitulation
ETF and Mutual fund Manager Van Eck recently shared, in their 2023 forecast, the half optimistic, half pessimistic prediction that Bitcoin will test the $10k-$12k floor in Q1, calling the end of the crypto winter. They foresee a “wave of miner bankruptcies” bringing the price down. The wave might have already started, with firms like Core Scientific filing for a Chapter 11.
Miners are experiencing pressure from three fronts:
Inflation driven by energy shortages is pushing their costs
The increase in interest rates is increasing the costs of the debt they acquired in the bull market.
Their main asset, BTC, has been devalued. , making their revenue shrink substantially.
According to Cryptoquant, miners hold 1.8M BTC. Some say that these bitcoins could create the next great wave of sell pressure. Other data points out that miners have already sold their assets.
4. Fraud | Avi Eisenberg arrested
Avi Eisenberg calls himself an “applied game theorist”; others call him a thief. In the past, he has used his game theory knowledge to exploit DeFi mechanics vulnerabilities. Like when he siphoned $112M from Mango Markets by taking both sides in massive transactions that manipulated prices. Back then, he claimed it was fair game because he used the tool as designed.
Last week Avi was arrested for market manipulation. The “code is law” mantra lost to the “law is law.”
The arrest comes with an interesting side of precedent.
At the time, Ian Corp, an attorney at the Agentis law firm, told Blockworks that “it’s possible that the SEC and/or CFTC bring civil charges against them, but they would have to also prove that the Mango token was either a security or commodity.” In the complaint, the Assistant US Attorney states that “Perpetuals are ‘swaps'” under the Commodity Exchange Act. https://blockworks.co/news/avi-eisenberg-committed-fraud
5. On-chain analytics | Alameda’s funds are on the move
Wallets identified as belonging to Alameda have started making transactions and moving funds. The goal seems simple: convert a basket of altcoins (and shitcoins) into ETH and USDT, and use mixers to obfuscate their destination (some claim they’ve ended up in bitcoin wallets).
The use of mixers makes it very unlikely to think that this is the work of FTX liquidators. It’s hard to argue with conspiracy theorists who see a link between SBF getting bailed out and Alameda funds returning to life.
However, Alameda wallets hold a mix of altcoins and straightforward shitcoins that could be affected by the liquidation.
6. Regulation | Coinbase’s recipe
Following FTX’s collapse, regulators faced a dilemma. Some could be inclined to go harder on crypto in the name of consumer defense. But FTX’s lobbying efforts pointed in that direction and SBF was the speaker for stronger control over centralized exchanges and for imposing obligations on DeFi protocols. Now that route, and those who sponsored it, looks toxic.
Coinbase recently published an article outlining its regulatory position, hoping to restart constructive communications. A quick TL;DR shows the two opposing directions in which they believe legislation should move.
Create regulatory clarity for centralized actors. Contrary to popular belief, crypto has been advocating for precise regulation for long so that centralized exchanges, custodians, stablecoin issuers, etc., have more explicit obligations and compete on a level field.
Let innovators innovate. Coinbase, a centralized exchange, requests leniency from regulators in approaching DeFi: self-custody and permissionless transactions should be treated like free speech.