Reflection and Outlook on the Crypto Market at Dusk

After experiencing a series of black swan events such as Luna, 3AC, and FTX, the encryption industry seems to be facing a twilight moment. These events have caused a huge impact on the entire industry and have left us with profound lessons.

Review of the Three Major Black Swan Events

In 2022, the encryption industry experienced three major black swan events: Luna, 3AC, and FTX, whose destructive power and influence far exceeded previous years. Tracing back to the source, we find that the crisis had long been secretly foreshadowed.

The Luna incident is a typical collapse of a Ponzi scheme. Abnormal market conditions and rapid withdrawals led to the instantaneous evaporation of Luna's market value of tens of billions. Many centralized institutions were unprepared for this, resulting in huge risk exposure.

Then the 3AC incident broke out. Many institutions held high-leverage positions, blindly betting that certain price levels would not be breached, leading to inter-institutional lending.

After the Ethereum merge in September, the market showed signs of recovery, but the sudden collapse of FTX once again triggered panic. The huge financial hole behind it was revealed, leading to a wave of withdrawals and the collapse of the empire.

These events expose some thought-provoking questions:

1. Institutions can also go bankrupt. Many large institutions in North America have misconceptions about risk management, leading to a chain reaction.

2. The quantitative and market-making teams suffered heavy losses in extreme market conditions. Market liquidity was severely insufficient, leading to assets being passively converted to low liquidity.

3. The asset management team is also impacted. They have accumulated a large amount of lending assets and derivatives, facing shocks in extreme market conditions.

These issues directly point to the operational problems of centralized institutions. The FTX incident may signal the twilight of centralized exchanges.

The Road to Rebuilding Centralized Institutions

The black swan event not only affected exchanges, but also impacted other centralized institutions. They ignored the risks of counterparties (, especially the risks of exchanges ). The illusion of being "too big to fail" has been shattered.

The traditional financial world has a lender of last resort, but the crypto world does not. The transparency of on-chain data leads to collapses happening faster. This is a double-edged sword, accelerating the bursting of bubbles but also leaving almost no window of opportunity.

Centralized exchanges may evolve into a bridge connecting fiat currency and the encryption world in the future. More transparent operations on the blockchain are worth looking forward to. Decentralized finance and derivative exchanges may gradually rise.

Centralized institutions need to be rebuilt. Mastering asset ownership remains the cornerstone. The wallet technology solution based on MPC is a good choice, as it can reduce counterparty risk.

Opportunities and Challenges of Decentralized Finance

With a large outflow of capital and interest rate hikes in the macro environment, DeFi is facing a shock. Currently, the yield is lower than that of U.S. Treasury bonds, and there are security risks associated with smart contracts.

But the market is still brewing innovation. DEXs around financial derivatives are emerging, and fixed income strategies are also iterating. With improvements in public chain performance, the interaction methods of DeFi may welcome a new transformation.

The current market is in a delicate phase. Losses by market makers have led to insufficient liquidity, increasing the risk of market manipulation. Assets that had good liquidity in the early stages are now easily manipulated, which may trigger a chain reaction.

In this environment, investment operations may become more conservative. A robust staking strategy is worth considering. At the same time, it is necessary to continuously monitor on-chain anomalies.

Internal and External Factors of Market Reversal

Market reversal requires the joint action of internal and external factors:

External factors: The previous bull market was driven by traditional investors entering. Currently, we need to wait for interest rates to drop to a certain level for hot money to flow back in.

Internal factors: The industry needs new killer applications and growth points. Currently, second-layer networks like ZK are bringing changes, but clear killer applications have yet to be seen.

Market reversals need to align with the inherent cycles of the encryption industry. Considering cycles such as the Ethereum merge and Bitcoin halving, there isn't much time left for application breakthroughs.

If internal and external factors cannot be in place in a timely manner, the industry's four-year cycle recognition may be disrupted, and the bear market may be prolonged. We need to adjust our strategies and expectations to cope with more uncertainties.

Conclusion

The crypto industry is going through a twilight moment, but dawn will eventually come. As participants, we should be practical builders, rather than spectators missing out on opportunities. Stay patient, accumulate strength, and prepare for the next round of opportunities.