This iteration of Surveilled is shorter and more of a link list. From now on I’m going to worry less about the format about the newsletter, and instead just point you to things I thought were interesting, sometimes with a more developed essay of some short.
More and more “post-mortems” on the crypto crash are coming out, primarily focusing on Three Arrows Capital, Celsius (FT $) and Voyager. No doubt they will not be the last, and since these stories are written in medias res, they cannot be relied upon for far-reaching conclusions.
A few common threads emerge though. First is that the complexity of the industry seems to have increased by a few orders of magnitude compared to 2018. It is now sufficiently complex that it is nearly impossible to anticipate where the heaviest blows will land, just like in the global financial crisis of 2008. More significantly, since the DeFi and TradFi worlds are becoming more entwined (FT $), there is a growing risk of contagion between the two. This is guaranteed to heighten regulators’ alarm.
Second, it is remarkable to what extent the crypto industry is reinventing the financial industry from first principles, without regulation, and thus making the same mistakes along the way. In this sense, the community’s techno-solutionism credentials are on full display. At the centre of the current crisis are so-called “yield farms”, which effectively work just like a bank: a saver/investor deposits crypto with such an institution, who in turns lends it out to other institutions or investors and charges interest, part of which it pays out to the depositors.
This brings us to the third point. In the absence of any regulation or enforcement however, those depositors run significant risks. The huge volatility in crypto makes it difficult to ensure sufficient collateralisation, exposing the yield farms themselves to a potential default of their borrowers, which could lead to their own bankruptcy. And then there have been cases of “rug pulls”, where the people behind the entreprise just run off with the deposits. Given the breakneck growth of the industry over the last few years, there are now many more affected individuals than in 2018, which will increase political pressure for regulation.
It was already clear that regulation was inevitable, but the fourth and last point is endogenous to the industry. Some of the better financed and perhaps better run players are buying (“bailing out”) smaller players that defaulted or are close to. There is some creeping centralisation taking place in other words, driven by business models rather than technology1. This raises questions as to whether a true “decentralised finance” model is possible, of course.
An example of technology-driven centralisation is Bitcoin mining: since it becomes ever more difficult it requires ever greater outlays of capital and expense, which only the biggest miners can afford. ↩