FTX Implosion Renews Interest in Crypto Staking and DeFi

It isn’t easy to talk about the future of staking in today’s crypto environment.

Staking is how you earn crypto rewards for helping secure a blockchain network. It’s now an $200 billion market. And an integral part of the industry.

In the wake of the FTX collapse, it feels like the entire crypto industry is burning down…

And it’s difficult to get your bearings in the chaos.

But the key here is to remember that FTX and other centralized finance (“CeFi”) crypto lenders are not compatible with the decentralized nature of crypto.

So as much as they try to manipulate and misuse crypto in their favor, you can’t cheat a blockchain.

Today, I’ll talk about the impact of FTX on the industry… And what it means for the future of blockchain and crypto staking.

A Market in Shock

It happened so fast.

From the initial report about its sister firm Alameda Research’s balance sheet to bankruptcy, the FTX collapse took all of nine days.

The size of it is remarkable too…

FTX was once worth $32 billion. Alameda Research was a billion-dollar trading firm doing $5 billion in daily volume. And its founder, Sam Bankman-Fried, or SBF, was worth $26 billion at its height.

Today, all of that has vanished and left a hole reported to be in the $8–10 billion range.

It’s a sharp turn for a man that Cointelegraph ranked its No. 1 person in crypto in 2021…

Back then, SBF worked toward achieving regulatory compliance. He took part in congressional hearings. He called on crypto exchanges to voluntarily report transactional activity to avoid market manipulation.

He was also a big lobbyist and political donor, reportedly donating nearly $40 million to the Democratic party for the 2022 mid-term elections.

And he was known for effective altruism… That is, the philosophical belief that one should aim to bring about the greatest good to the largest number of people.

But when it came to light that he secretly used customer funds to bail out Alameda… it turned out he wasn’t so altruistic after all.

Because while FTX was burning through customer funds, SBF covered up his fraudulent activities and lied about it on Twitter…

So it’s no surprise that when the company finally came crashing down, it was fuel for the crypto skeptics and naysayers, and the industry took a hit.

The crypto market lost over $200 billion in value from its November peak… Bitcoin (BTC) and Ethereum (ETH), the two largest cryptocurrencies by market cap, are down 23% and 27%, respectively…

And we’ll be dealing with the FTX fallout for months and years to come.

This is bad news for the sector, but does the collapse of FTX really mark the death of crypto?

Let’s explore…

[Whitney Tilson: Gold 2.0 Tap Into the Most Lucrative Vein of the SWaB Revolution]

FTX’s Collapse Shakes the Industry

I’m not going to sugarcoat it. The impact of the FTX collapse on the crypto industry is very negative.

Crypto sentiment wasn’t great to begin with… So, in addition to the billions lost in value, FTX destroyed what little trust was left in crypto and introduced more uncertainty.

In just the last few weeks, CeFi crypto lenders BlockFi and Salt Lending have since shut down operations…

Genesis Global Capital, the lending arm of crypto investment bank Genesis Global Trading, temporarily suspended redemptions and new loan originations…

And numerous crypto funds that used FTX are now defunct.

It’s also reasonable to think that big-money institutional investors and others waiting on the sidelines might stay there… biding their time while the contagion runs its course.

So venture capital into the space will likely tighten up… and we’ll likely see increased regulatory scrutiny.

FTX is already facing a criminal investigation in the Bahamas…

In the U.S., the Securities and Exchange Commission (SEC), Department of Justice (DOJ), and U.S. Attorney’s Office for the Southern District of New York are also conducting investigations…

And U.S. Senator Cynthia Lummis said the FTX collapse is the “clearest example yet of why we need clear rules of the road for digital asset exchanges in the United States.”

So in the short term, this will shine more light on the bad parts of crypto… But in the long term, increased regulatory clarity is a positive for the crypto industry.

Better oversight over reserves, audits, and risk controls would go a long way to quell investors’ fears… But we need to make an important distinction here.

Most of the meltdowns in crypto, dating back to the collapse of Mt. Gox in 2014, revolve around CeFi companies.

(The collapse of Three Arrows Capital, Voyager, FTX, and Alameda Research fall into this category.)

But CeFi meltdowns don’t change blockchain technology or stop the operation of blockchains and the applications running on them.

In fact, what’s happening on the blockchain is the exact opposite…

[James Altucher’s Investment Network: Coiled Cryptos To Make A Fortune]

FTX’s Collapse Has Spurred Renewed Interest in DeFi

After FTX, you might think everyone would be cashing out of crypto… But that’s not what we’re seeing.

Instead, the FTX collapse has spurred renewed interest in self-custody and decentralized finance (DeFi) platforms.

The week after the FTX collapse, investors withdrew nearly $3 billion BTC from exchanges.

According to crypto research firm Glassnode, on-chain figures suggest that many HODLers (“Hold On For Dear Life” crypto investors) have opted for non-custodial wallets.

At the same time, crypto users withdrew $2.5 billion ETH from centralized crypto exchanges, according to CryptoQuant… And data shows it’s all going into DeFi platforms.

Decentralized exchanges (DEXs) executed $32 billion in volume in the week following the FTX collapse – a roughly 150% increase from the week prior…

  • DeFi’s largest protocol, MakerDAO, saw addresses using the protocol increase by 33%.
  • Borrowing and lending protocol Aave saw a 70% increase.
  • Curve, a decentralized exchange, saw a 63% increase.
  • And Uniswap, the most popular decentralized exchange, overtook Coinbase in Ethereum (ETH) trading volume.

Despite a tumultuous 2022, these DeFi protocols keep operating as intended…

That demonstrates the general strength and potential of the blockchain and Web 3.0.

These protocols continue to be in active development… And keep in mind the FTX collapse does not change the record number of developers working in crypto.

This, combined with sensible regulations around centralized crypto intermediaries, can pave the way for mainstream adoption.

So that’s great for our readers…

Here at PBRG, we focus on crypto and crypto opportunities like staking… And staking is integral to blockchain and Web 3.0.

Securing the Network and Earning an Income

Long-time readers should be familiar with crypto staking (we also call it “crypto income”)…

Without getting too technical, staking is using your crypto to participate in a network. (You’ll hear the process referred to as Proof of Stake or “PoS.”)

So you deposit your coins in a blockchain wallet or application… and that helps secure the network by guaranteeing your staked crypto is available to validate transactions on the underlying blockchain.

In return, you receive a small crypto reward for participating.

Staking is integral to running a blockchain. And hence everything on top of that, from DeFi to Web 3.0.

We use wallets where we control the keys. Our funds are locked in smart contracts. The process is wholly decentralized. And we can generate income, too.

Professional staking service Staked estimates annualized staking rewards of $5 billion… even after the FTX collapse.

So while the collapse is a negative for the industry, good things will come from the situation.

We see that already with the push into non-custodial wallets and DeFi applications… And it wouldn’t surprise me to see increased activity in staking as well.

Regards,

Greg Wilson

Analyst, Palm Beach Daily

P.S. When the dust from FTX settles and institutional money comes pouring in, it’ll only be a matter of time before crypto rebounds and hits new highs…

[Jim Rickards Asset Emancipation: Profit from the 3 Companies Building “Biden Bucks”]

Read more from Greg Wilson at PalmBeachGroup.com

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