2022 On-Chain
Credit Crisis, Collapses & The Merge
Today we wrap up the highlights for crypto in 2022. We offer a concise summary of the key events that unfolded throughout the year, such as the collapses of Terra and FTX, the industry’s credit crisis and Ethereum’s merge.
Though it’s impossible to cover everything that happened in this eventful year, we aim to provide valuable analysis of the most relevant stories driving crypto in 2022 and throughout the near future.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin’s network fees collapsed even further than its price as transaction demand plummeted
- Ethereum fees fared relatively well, adding up to over $4.2B in 2022 and dropping less ETH’s price
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- 2022 eroded trust in centralized crypto custodians, with FTX, Celsius and Voyager users being unable to withdraw their assets as these entities collapsed
- The result has been nearly $10B of Bitcoin and $13.4B of ETH leaving
2022 On-Chain — Credit Crisis, Collapses & The Merge
2022 was crypto’s most chaotic year yet. As macro woes took over the steering wheel, unsustainable practices that had thrived in 2021 came crashing down. Amongst these, irresponsible credit, “ponzinomic” token models and frauds brought mayhem to the crypto space.
Credit Hangover — The amount of leverage in crypto crashed following a frenzied explosion in 2021
- Per DeFi Llama, the amount of borrows in protocols dropped by 82% in 2022, after increasing by 43x in 2021
- Though opaque, centralized loans likely took an even larger hit as Genesis, BlockFi and Celsius, three of the top CeFi lenders in 2021, all collapsed
- In 2021 the fast growth of the lending space fuelled competition where lenders offered unsustainably high yields of 8%-12% to attract depositors
- This led CeFi lenders to rely on increasingly riskier borrowers or protocols as the source for these yields, fuelling UST’s growth in late 2021/early 2022
- Then as Terra collapsed, it set off a domino effect bringing down the whole industry
House of Cards — High leverage, lack of proper risk management and fraudulent practices washed out bad actors from the crypto space
- As LUNA and UST wiped out $50B of value, it exposed that Three Arrows Capital (3AC), one of the largest borrowers, had fraudulently stated that they had more assets under management than they did
- 3AC then defaulted on its loans and was unable to repay many CeFi lenders, leaving a whole worth billions in their balance sheets
- Around the same time, Alameda Research is believed to have become insolvent and took funds from FTX’s users without them realizing
- Then as FTX users began withdrawing funds in a bank-run-like manner, it uncovered FTX’s scheme and left their users with at least $8B in losses
It is still unclear how long FTX had been criminally funnelling user funds to Alameda, but Caroline Ellison, Alameda’s CEO, confessed to the SEC that they had a “virtually unlimited credit line, surreptitiously siphoning FTX’s customer funds onto the books of Alameda” as she pled guilty for fraud. This story is still developing as we find out that SBF may pay a bail of $250M and stay on house arrest.
Altogether, not only did these events lead to tens of billions of losses of user deposits, they also created forced sellers, contributing to crypto’s total market cap loss of $1.3 trillion. While these losses can be upsetting, the situation also creates the opportunity for the crypto space to be rebuilt in a more sustainable way now that these bad actors have been washed out.
Even though the aforementioned events eclipse crypto’s progress in 2022, Ethereum’s merge was likely the most notable milestone achieved within the space.
Eco-friendly, more secure and less inflationary — Ethereum’s transition to proof of stake provided all of these key benefits to the network
- Ethereum’s energy consumption dropped by approximately 99%, decimating FUD about “NFTs being bad for the environment”
- Ether’s circulating supply has only increased by 2,100 ETH since the merge, a negligible amount compared to the 1.16M ETH it would have grown by under proof of work per Ultrasound Money data
- Finally, the amount of ETH staked nearly doubled to 15.8M ETH, making it more costly to attempt to attack the network while economically aligning validators’ incentives with Ethereum’s long-term growth
Asides from Ethereum’s mainnet upgrade, layer 2s such as Arbitrum and Optimism have recorded significant growth throughout 2022, with L2s now processing a higher number of transactions per second than mainnet and seeing a nearly 3x growth in their ETH total value locked, based on L2Beat data.
Overall, though these achievements may appear pale in comparison to the drama that unfolded in crypto in 2022, they have been years in the making and are worth highlighting. These upgrades, like many others not mentioned for brevity purposes, set the base for broader crypto adoption in 2023 and beyond. Ultimately, the 2022 bear market marks a difficult period for crypto, but one that provides the opportunity to restructure the industry and build towards crypto adding real value in a sustainable way.
That’s all from the IntoTheblock team for the year. Make sure to check out our recently launched indicators, which you can check out through our Medium announcement, and take advantage of our 40% OFF promotion below.
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