2022 has been full of valuable (and expensive) lessons.
**What were the most important lessons you learned this year?**
For those of you who did not have the pleasure of keeping a close eye on DeFi during the whole year I’ll try to summarize the most important events of the past year:
After a blowoff top in late 2021 the crypto ecosystem had gone through multiple meltdowns and a sustained bear market in 2022. The Terra Luna ecosystem had a market cap of nearly $40 billion before the unsustainable economics of the project quickly resulted in a depeg from $1 to fractions of a penny. This triggered multiple bankruptcies of centralized exchanges and some lenders, notably Celsius. FTX started buying struggling lenders, a move that many interpreted as a display of strength. We later learned that FTX had to buy them so that they do not sell the huge amounts of $FTT collateral those lenders held. A month ago FTX also went bust in one of the biggest financial scams in human history.
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3 thoughts on “What was the most important DeFi lesson you learned in 2022?”
For me the most important lessons were 2:
**1. DeFi can surviving large financial disasters without a central bank**
DeFi and crypto as a whole is probably one of the largest experiments of a significant financial ecosystem without a central bank. At this point, the crypto financial world is larger than many countries, so these experiences give us very valuable information.
Every meltdown we go through, every bankruptcy and large smart-contract hack we survive without a bailout is a testament that a financial system without a centralized lender of last resort can exist.
We’ve seen many proof of that this year – the centralized and decentralized crypto worlds went through multiple crises this year.
On the centralized side of things, the fraud around FTX and Alameda Research destroyed $10s of billions and decimated the Solana ecosystem (which used to be a top 5 layer 1 blockchain). Multiple lenders and smaller exchanges also went bust.
On the more decentralized side of the crypto ecosystem we all watched while the Terra / Luna meltdown burned $40 billion of user funds and destroyed a top 5 (in terms of TVL) layer 1 blockchain. In addition we’ve seen dozens of decentralised bridge hacks (Wormhole / Portal, Harmony, Axie / Ronin, Nomad) each of which had a huge impact on the blockchains it connected. Some of those blockchains have not recovered and probably never will.
The traditional financial world has a simple solution for problems like the ones above – central banks are the lenders of last resort that act as a crutch to make sure that the financial ecosystem keeps moving forward.
Central banks protect us from sharp short-term shocks (COVID-19 pandemic, 2008 recession, 2001 airline bailout) at the cost of longer-term pain (inflation).
Every day without a crypto-central bank proves that fair financial markets can exist without a master. Whether they’re better or worse than the traditional financial world will be a lesson for future years.
**2. Decentralized finance is more resilient than centralized finance**
While 3 Arrow Capital was defrauding their lenders of hundreds of millions they were paying back their DeFi loans because they had to.
While FTX was defrauding their users of 10s of billions they were paying back their loans on AAVE and withdrawing from DeFi to pay users because they could just lie to autonomous programs the way they lied to lenders and users.
On the more decentralized side of the crypto ecosystem, we all watched while the Terra / Luna meltdown burned $40 billion of user funds and destroyed a top 5 (in terms of TVL) layer 1 blockchain. In addition, we’ve seen dozens of decentralized bridge hacks (Wormhole / Portal, Harmony, Axie / Ronin, Nomad) each of which had a huge impact on the blockchains it connected. Some of those blockchains have not recovered and probably never will.
The protocols that remained can proudly say that they’ve gone through a 2008-style meltdown without a bailout. The autonomous code behind AAVE, MakerDAO, Uniswap, Compound, Curve and many other protocols has survived disasters that destroyed many centralized institutions and that makes me optimistic about the future of a trustless financial system with no intermediaries.
Trust no one.
If you can’t understand it, don’t invest.
Question what your investing in.
FOMO will kill you. Have a plan. Opportunities are abundant.
Eth is the ultimate sound money.
99% of alts will crash and burn next cycle.
Most important lesson: get out of all pools after people and media go crazy about dog coins. Never marry to altcoin. Never have an illusion that you will earn enough % from pools to balance downturn.