The author of this text once heard the following sentence: ‘there is as much going on in crypto in one day as there is in the world of traditional finance for a year'(sic!). Yes, it is difficult to find a more dynamic industry than that of cryptocurrency. Nevertheless, nothing prevents us from nevertheless looking back at 2022 from the perspective of digital currencies and trying to answer the question: what was it like? You are welcome!
The fall of Terra
At its peak, Terra was one of the largest cryptocurrencies in the world in terms of market capitalisation. Terra saw staggering growth in late 2021 and early 2022, largely due to the success of its native stablecoin, UST. Unlike most stablecoins, UST was not fully hedged: it relied on an algorithmic mechanism to stay on par with the US dollar. The system allowed users to mint new UST tokens by burning an equivalent amount of Terra’s variable LUNA coins or exchanging USTs for new LUNA coins.
Terra’s mechanism helped the blockchain rise at the start of the bear market, as cryptocurrency users sought refuge in stablecoins to avoid exposure to plunging cryptocurrency assets. UST was a particularly tempting option because of Anchor Protocol, a lending platform on Terra that provided a 20% yield on UST loans. As market participants began to flee to USTs to take advantage of the gains, they increasingly burned LUNA, pushing its price higher. This increase, coupled with strong statements by Terra CEO Do Kwon on social media, gave the impression that Terra was simply immune to the downward trend. UST, on the other hand, seemed even more attractive.
At its peak, the Terra ecosystem was worth more than $40 billion, but the dual token mechanism proved disastrous. A series of whale-like sell-offs undermined UST pegs on 7 May, setting off alarm bells before UST saw a brief recovery. Two days later, USTs lost their pegs again, triggering a massive run on the banks. UST holders rushed to exchange their tokens for LUNA coins, significantly increasing the supply of LUNA and depreciating the value of the coin, which in turn prompted even more UST holders to redeem. By 12 May, UST was trading at US$0.36, while the price of LUNA had fallen to fractions of a cent.
Terra’s collapse devastated the market, but the damage did not end there. The protocol implosion triggered a sharp liquidity crisis, hitting major players such as Celsius, Three Arrows Capital, Genesis Trading and Alameda Research. Lawmakers from around the world also condemned the risks posed by stablecoins, especially algorithmic ones. In many ways, Terra was the biggest failure of decentralised finance, and the consequences of its implosion are still emerging.
US Treasury imposes sanctions on Tornado Cash
Tornado Cash is a privacy-protecting protocol that helps users hide their transaction history in the chain. On 8 August, the US Treasury Department’s Office of Foreign Assets Control announced that it had placed the protocol on its sanctions list. In a statement, the agency claimed that cyber criminals (including North Korean state-sponsored hackers) were using Tornado Cash as a vehicle for money laundering.
The ban has outraged the cryptocurrency industry. Cryptocurrency companies such as Circle and Infura immediately moved to comply with the sanctions, blacklisting Ethereum addresses that interacted with Tornado Cash. Some DeFi protocols followed suit, blocking wallets from their frontends.
Following OFAC’s announcement, the Dutch Information and Fiscal Investigation Service arrested Tornado Cash creator Alexey Pertsev on suspicion of facilitating money laundering. He is still in custody, but no formal charges have been brought against him at this time.
The banishment of Tornado Cash was unprecedented as it was the first time a government agency had punished open-source code rather than a specific entity. It also raised concerns about Ethereum’s ability to remain immune to censorship.
Commendably, the cryptocurrency community has taken various initiatives to combat the decision, the most notable of which is Coin Center’s lawsuit against OFAC. The outcome of the case could have a huge impact on the future of cryptocurrencies, as it will determine whether the US government has the right to sanction other decentralised projects.
The demise of FTX
The Bahamas-based exchange was known for spending big money to promote its image. Clearly targeting the US retail consumer, FTX went particularly big on associating itself with sports, striking sponsorship deals with the likes of Tom Brady and Steph Curry, slapping its name on the Miami Heat arena and spending money on advertising during the Super Bowl. When other centralised custodians began to collapse, FTX stepped in, offering emergency loans and investments to protect itself from the worst.
Its unflappable CEO, Sam Bankman-Fried, made a special effort to swap shorts for a shirt and tie when he visited Washington to meet with politicians and regulators, assuring them of FTX’s credibility and commitment to government-industry collaboration to establish sensible rules and regulations for the space. He graced the covers of magazines, hosted former heads of state at FTX events and made grand displays of his charitable leanings, insisting that his ultimate goal was to make as much money as possible so that he could donate it to good causes.
So, in early November, when there were rumours of illiquidity at FTX’s officially-unofficial sister company, Alameda Research (also founded by SBF and, according to court records, entirely under his control), FTX’s operations may have been put on hold. This caused a bank run on the platform, which then revealed that most of the exchange’s assets had already been lost. According to most accounts, the story is that FTX ‘lent’ these deposits to Alameda, which lost billions in mismanaged, risky positions. Alameda then lost them too, leaving a $10 billion hole in FTX’s books.
Ultimately, FTX declared bankruptcy and SBF ‘resigned’ as CEO of FTX. He was immediately replaced by John J. Ray III, a man who had made a career of overseeing the dissolution of failing companies, some of which had collapsed through fraud or other malfeasance.
Future prospects for Ethereum
There wasn’t much to distract us from the bad news in 2022, but Ethereum brought some relief in the summer when it started to look like ‘the Merge’ might finally ship. Ethereum’s long-awaited Proof-of-Stake update has been discussed for as long as the blockchain has existed, so expectations were high when the September launch was finalised.
The hype for Merge was enough to lift the market out of despair after June’s liquidity crisis, and talk of forking the network for Proof-of-Work helped the narrative pick up steam. ETH has risen more than 100% since the June bottom, raising hopes that the benefits of Merge – 99.95% improved energy efficiency and a 90% cut in ETH issuance – could help cryptocurrencies turn the bull market around.
The update finally shipped unhindered on 15 September. As some savvy traders predicted, Merge was a ‘sell the news’ event and EthereumPOW failed, but the Ethereum community was unfazed by the weak price action. Often compared to an aeroplane changing engines in flight, Merge was hailed as the biggest cryptocurrency technology update since the launch of Bitcoin, and Ethereum developers were widely applauded for its success.