Terra, Celsius and the lessons of the 2008 financial crisis

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Those of us who have spent the past few years building and investing in this industry have experienced significant failures like this before. But consumers shouldn’t have to deal with these issues because that’s not how blockchain was designed.

When the original bitcoin white paper was written in the wake of the 2008 financial crisis, it described a Bitcoin blockchain designed for everyone to have transparent control over their wealth. The aim was to avoid double-spending and, ultimately, to weed out middlemen who had lost the trust of the very people they were supposed to help.

Satoshi Nakomoto, the anonymous creator of this infamous Bitcoin whitepaper, clarified that each token should be held by one wallet at a time, removing the possibility of leverage to create deeper problems. Unfortunately, companies like Terra, Celsius, and many others place an opaque layer of funding on top of a transparent system, allowing for double-spending (also known as double-mortgage), partial capitalization, and dangerous leverage.

These three problems can magnify losses by multiplying the risk taken with a given amount of capital. Creation of undercapitalized and overleveraged investment banks a $15 trillion loss during the financial crisis, although a tiny part of this capital was at risk.

A better approach than the centralized one taken by Celsius allows users to control their own assets. Known as “non-custodial,” these solutions allow people to own their private keys and take control of their own finances. This way, they are still in control of their cryptocurrency and non-fungible tokens (NFTs).

As we learned from the 2008 financial crisis, there is a need for a decentralized approach to financial systems that puts people first. We can also learn three good lessons from today’s most recent disasters.

1. Algorithmic stablecoins are not possible.

UST, unlike USDC, was not backed by US dollar reserves, so Terra could not pay in a tough market. Make sure your stablecoins are backed by cash reserves and avoid stablecoins that are backed by a basket of cryptocurrencies.

2. Use non-custodial wallets.

If you trust centralized players like Celsius with your assets, you may not be able to withdraw your money in a crisis. The very nature of Celsius – and other well-known custodial wallets – controls the user’s private keys, meaning a third party has full control of your funds.

3. Leveraged and margin trading is for professionals only.

Even in a crisis like this, BTC has fallen around 50% since the start of the year, which means that everyone who holds real BTC in real wallets always has half of their money. If you were using 10:1 leverage, you would have lost all your money by January 20 of this year.

These lessons were exactly the same lessons Wall Street should have learned from the housing crisis of 2008. Mortgage-backed securities were supposed to create something stable out of a basket of all-correlated assets, just like algorithmic stablecoins. Investment banks like Lehman Brothers leveraged their investors’ money to make even more money, as did Celsius. This kind of leverage can turn a moderate downturn into a massive crisis.

In 2008, individuals were taking on more mortgage debt than they could afford because they believed the real estate market would always go up. At the start of 2022, crypto investors held seemingly safe and stable investments that hid risky bets beneath them.

In both cases, innocent people paid the price for companies acting recklessly with other people’s money and for sophisticated investors who used their credibility and capital to lure millions of consumers into investments they did not understand. entirely.

But the ultimate rule for investors to remember is Warren Buffett’s classic advice: “Be fearful when others are greedy, and greedy when others are fearful.”


Marc Blinder, Founder and CEO of AIKON and main contributor to Blockchain ORE.

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