Crypto – looking back at a year of birth, life and death

12 Dec 2022

Opportunities arose in and around the cryptoverse which had become fertile breeding grounds for grift and greed, but there was a happier side of crypto in 2022.

The mandatory December ‘year in review’ article on any matter of public interest has always made me a little testy. Perhaps it is because it seems like lazy journalism (it is not new information, it is old), but of course that is unfair. A look in the rear-view mirror is often clarifying, particularly when the future is everything but.

Crypto, of course, presents a special case. Because the past year was so confusing – death and destruction thrown into uncomfortably close quarters with birth and growth.

So let’s dispense with the obvious first. Which is that opportunities arose in and around the cryptoverse which had become fertile breeding grounds for grift and greed, from which has sprouted a great garden of ugly flora. There were many of these events this year, somewhere around 60, if one skims the best online source for crypto carnage, www.rekt.news. That is about one per week.

The best known of these black sheep is the notorious FTX (which continues to leave more scorched earth daily). But to be scrupulous about this, we need to separate those projects into very different types of malfeasance.

There were those projects in which there were humans committing outright theft or fraud. Like Sam Bankman-Fried and colleagues at FTX.

There were those projects which fell apart because their money was entangled with a failing counterparty, like the many projects that had lent FTX money and were subsequently rendered insolvent.

Read in Daily Maverick: “The FTX affair – of human flaws and failures”

There were those projects that leveraged up on margin and hopes for a continued bull market and which simply collapsed quickly in the cacophony of margin calls as the bears started to roar.

There were those projects whose underlying economic models were based on hype and hope and funny-money tokens and whose asset values simply cratered to near-nothing as public perception turned negative.

There were those projects in which some smart techno-thief simply found a bug or vulnerability in the software and exploited it, draining accounts or liquidity pools, sometimes even legally.

Why is it important to pull these apart? Because some of them had nothing to do with crypto, and some did. FTX had little to do with the underlying technology of crypto, other than that SBF stored the money on a blockchain before stealing it.

Read more news and analysis on the latest in the world of cryptocurrency

Hacks of buggy smart contracts contributed to massive loss of investor funds, and most definitely had to do with crypto. But there is no way for the law to insist on bug-free software. That belongs in the wheelhouse of insurers to find a way to shoulder that risk at a profit.

And then there was the class of investor money lost because punters or asset managers thought that a project was going to the moon, and it crashed to Earth through no fault of its creators. That is a caveat emptor problem, with nobody to blame but the buyers and their unrealistic and often uninformed optimisms.

Read in Daily Maverick: “Crypto — how to heist $47m in seconds and walk away, scot-free”

In any event, whatever the cause, the extent of losses in 2022 overwhelmed previous years, perhaps skewed somewhat by the massive contagion effect that continues in the wake of the FTX crash. One may look back at this year and be tempted to say, well, this was the year that the crypto industry broke, and now it must start to repair itself.

But that would not be accurate, because there is a yang to this yin.

The upsides

Most visible of the happier side of crypto was the Ethereum Merge on 15 September. It was headlined as the long-planned migration from the energy-hungry proof-of-work consensus mechanism to the energy-thrifty proof-of-stake consensus mechanism. But that was less important than this – it was the largest, riskiest software undertaking in history which was performed in real-time while billions of dollars were swirling through the Ethereum network.

The system was not brought down for even a second. Hundreds of programmers developed and tested and developed and tested, tested and tested for years and years. A marvel of human ingenuity that went off without a hitch.

Meanwhile the world of NFTs, which started as a tulip frenzy of questionable digital art sales, has survived its early hucksterism and roller coaster markets to start maturing into the fuel of the next Web – providing the ability to protect property rights in a place where many of us spend more than eight hours creating everything from emails to browsing histories to social media posts while allowing others to own and monetise all of it. Without sharing and often without permission. NFTs and digital property rights are perhaps the most important of all developments this year, and it is happening well below the surface of sensational headlines.

Then there are the blockchain-based financial projects which just went on trucking throughout this crazy year without any trust betrayal, value destruction or volatility, like the crypto exchange Uniswap, which has recently passed $1-trillion in exchange transactions – securely, immutably, cheaply and quickly, without any human interaction, fulfilling the original promise of crypto without fanfare and outside the clutches of special interests and grabby middlemen.

Read in Daily Maverick:

“Cryptoverse rocked by massive implosion — and the reverberations still linger”

“Welcome to the machine — yes, AI is capable of creative output”

And there were the ongoing developments in the metaverse, Defi, NFTs, gamefi, DAOs, identity, Web3, crypto infrastructure, protocols, cryptography and other threads of the cryptoverse. I have a high-level view of these via the firehose of my crypto-curated social media feeds. Much of this is happening outside of the public line-of-sight, and it is dizzying.

Take just one of these new developments, quietly having been developed from a kernel of 50-year-old mathematics, now being readied for crypto primetime. It is called Zero-Knowledge Proofs. This is a set of cryptographic magic that allows someone to state that something is true without having to provide any further details. Me: how much money do you have? You: R1,000. Me: Let me see your bank account. You: No, my statement of ownership of R1,000 is attested by a zero-knowledge proof. It is therefore true. This has startling implications for privacy.

But here is my prediction for 2023. Crypto will disappear off the front pages to be replaced by the new darling of sensationalism, AI. From mainstream headlines to venture capital to talking heads to concerned activists, it’s going to be all about AI next year.

Crypto will get a well-deserved rest from the frenzied market of public opinion. DM

Steven Boykey Sidley is a Professor of Practice at JBS, University of Johannesburg. He is the co-author of Beyond Bitcoin: Decentralised Finance and the End of Banks (with Simon Dingle).

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The upsides