Decentralized Funds: Management and Transparency — Why It Matters More Than Ever
The turbulence that we’ve experienced in the crypto markets over the last two years has been demoralising and demotivating for many. That’s just speaking from an overall price action standpoint. Many enter the market having been lured in with the promises of overnight fortunes. Well, 2022 was undoubtedly a reality check. Perhaps the most disappointing aspect of the whole episode was the root causes of the annihilation we saw across the market last year. Greed. Reckless greed that we are accustomed to seeing in the traditional finance sector. The kind of reckless greed that has led the world to the brink of financial catastrophe in recent decades. Crypto is meant to be a way out. For now, at least, that idea has been nothing more than a fallacy.
The crux of the problems can be traced back to the bank run we essentially witnessed on Terra/Luna. The enormous outflow of cash from UST led to the stablecoin de-pegging and set about a sequence of events that would leave both Terra and Luna dead in the water. In May 2022, the value of Luna collapsed from over $120 a coin to effectively zero, wiping out over $50bn in market capitalisation of UST/LUNA and causing over $400bn in losses for the broader crypto markets.
The sequence of events needs little in the way of retelling as many are no doubt still hurting from seeing their life savings decimated. Perhaps they’ll take some consolation from the fact that the creator of what’s now being dubbed as an elaborate Ponzi scheme, Do-Kwon has finally been arrested after months on the run.
It was to be a match to a powder keg and kick-started a sequence of events that would have seismic and long-lasting aftershocks across the entire space. Crypto hedge fund Three Arrows Capital (3AC), which had a peak market valuation of more than $560 million, suffered significantly following the collapse of UST. That collapse destroyed a lot of confidence within the market and expedited the downtrend the overall market took in the following weeks and months. A flood of margin calls from 3AC’s lenders sought repayment, but the firm lacked the funds to meet the requests, which inevitably led to its collapse.
The contagion didn’t end there. Voyager soon followed by filing for bankruptcy after 3AC defaulted on a $650m loan. As a result, Voyager lost a significant sum of customers’ money. Celsius, another prominent player within the industry was next in line. The wider uncertainty in the market again led to a run on their holdings to move to safer pastures. They halted BTC withdrawals, claiming they were forced to do so as a result of extreme market conditions but the reputational damage was done. Their token price collapsed by 70% in a matter of hours and further in the days that followed. Despite holding around £3.8bn in assets, they accrued a total of $6.6bn in liabilities. Crazy. Again, it was the customers that were hurt the most.
This leads us to FTX. The most high-profile collapse we’ve seen in crypto yet. The entire FTX debacle serves to highlight one of the most notorious cases of capital mismanagement in history. Binance CEO, CZ, may have sped the collapse up a little faster than it might have played out but had he not, the problem likely would have continued to spiral out of control which would have led to even more depositors being harmed. There’s no need to get too technical with the specifics. They were using customer deposits to trade a market that was moving incredibly irrationally following a year of manic events and got destroyed. Risk management as we now know was non-existent, with customers again being left to bear the full cost of the criminal negligence and fraud that was at play.
All of the problems we faced in 2022 revolved around a woeful lack of transparency concerning centralized entities that had amassed substantial control and power within the space. It’s that simple. Even in the aftermath of the FTX collapse, we saw exchanges scramble to prove their reserves, but on-chain data seemed to suggest that exchanges were co-mingling with each other and transferring large chunks of assets back and forth to give the impression they were liquid.
For an industry that prides itself on the transparent nature of the blockchain and public ledgers, there’s not much emphasis on holding powerful entities to account when it comes to their reserves and exactly what they may or may not be doing with customer funds in the background. This is a huge cause for concern. Until the masses that operate within the space realise that fact, we won’t get more transparency as it’s down to users and investors to push for it. It should be a prerequisite for these firms to provide as much clear and concise information as possible that can be continuously tracked to deter them from acting up as many have over the last 12 months.
Aside from the greater need for transparency, the remedy lies in returning to the true nature of the space in the form of decentralisation. Humans, not all but some, are inherently greedy and self-serving. The crypto space has attracted some of the worst and most nefarious actors imaginable in recent years. The premise behind the blockchain is supposed to be decentralization. No one should have to trust their assets or investments in one or several people that make up an organisation, but if they do, total transparency must be the standard. If the space is to flourish in the ways we believe it can and should, the onus lies on us all to not only expect better from the wider market but to be a driving force in enacting change for the better. 2022 was a year to forget in many ways, but the pain inflicted can also serve as a lesson going forward, not just for investors, but for those building the next iteration of the financial world. These nefarious characters that have plagued the space will come and go. The technology is here to stay.
About Alvara Protocol
The Alvara Protocol is a decentralized platform that utilizes the ERC-BTS (Basket Token Standard) to create and manage funds on the blockchain. Alvara offers a comprehensive fund Factory and Marketplace, with a transparent leaderboard showcasing the performance of every BTS created. ALVA and veALVA tokens assume crucial roles in driving the ecosystem’s growth and governance with veALVA holders wielding significant influence over the substantial ALVA reward stream. Removing traditional barriers, Alvara fosters a democratic meritocracy in crypto investing, enabling full lifecycle fund management, from creation to ownership transfer, within its seamless framework.