May and June 2022 were two of the worst months for the cryptocurrency markets since the 2018 crypto winter. First, Terra’s algorithmic stablecoin, UST, collapsed, wiping away billions of dollars from cryptocurrency investors worldwide. Then, one of the leading crypto lenders, Celsius, suffered a complete collapse of liquidity and locked two million investors out of their tokens.
Those of us who have spent the last few years building and investing in this industry have seen significant failures like this before. But consumers shouldn’t have to face these problems because it’s not how blockchain was designed.
When the original Bitcoin whitepaper was written in the wake of the 2008 financial crisis, it described a Bitcoin blockchain designed for each person to control their assets with perfect transparency. The purpose was to prevent double-spending and ultimately remove the middlemen who had lost the trust of the very people they were supposed to be helping.
Satoshi Nakomoto, the anonymous creator of that infamous Bitcoin whitepaper, detailed that each token is to be held by one wallet at a time, removing the possibility of leverage to create deeper problems. Unfortunately, companies like Terra, Celsius, and numerous others put an opaque layer of financing on top of a transparent system, allowing double-spending (also known as double hypothecation), partial capitalization, and dangerous amounts of leverage.
All three of these issues can magnify losses by multiplying the risk being taken with a given amount of capital. Under-capitalized, over-leveraged investment banks created a $15 trillion loss during the financial crisis—despite having a tiny fraction of that much capital at risk.
A better approach than the centralized one taken by Celsius allows users to control their own assets. Known as “non-custodial,” such solutions allow people to own their private keys and take control of their own finances. This way, they always control their cryptocurrency and non-fungible tokens (NFTs).
As we learned from the 2008 financial crisis, it is necessary to have a decentralized approach to financial systems that puts people first. We can also learn three good lessons from today’s most recent disasters.
This article originally appeared in Fast Company. Continue reading the article here.
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