Overview of Traditional Finance Failing

  • Legacy media blamed crypto for the collapse of FTX, Voyager, Celsius, and BlockFi last year.
  • Two TradFi banks are now insolvent – Silvergate and Silicon Valley Bank – impacting the depeg of Circle’s USDC.
  • The collapse of FTX showed that DeFi worked where TradFi failed.

Crypto Not at Fault

Despite accusations from legacy media outlets, none of the issues these failed companies faced were caused by blockchain. Instead, criminal activity, greed, poor risk management, novice business processes, hubris, and malicious acts were to blame – all occurring off-chain. The ‚Bitcoin is dead‘ mantra was heard 27 times in 2022 but this was down roughly 50% from the previous year.

DeFi Survives Contagion

During the collapse of FTX it became clear that DeFi loans connected to the contagion operated as intended and liquidations occurred without impacting the underlying DeFi protocols themselves. This has been seen again with Tether surviving bank runs and redeeming tens of billions over the last 12 months while operating without fault; blockchain record of USDT’s supply has proven itself time and time again. However Circle’s USDC may suffer a different fate due to its reserves which were held off-chain.

Blockchain Can Fix Issues

The issues negatively affecting crypto are not due to on-chain failures but rather issues within legacy financial markets which are only impacting crypto due to governmental resistance to adopting distributed ledger technology such as blockchain. Blockchain can fix many problems associated with traditional finance and will likely be adopted more widely in future years.

It is clear that blockchain technology can provide solutions for many issues encountered in traditional finance markets. Whilst crypto has suffered as a result of legacy finance market collapses it is important to remember that this is not a problem caused by blockchain but rather by human error or government resistance. As adoption continues there will likely be more instances where blockchain outperforms traditional finance systems.