{"id":245570,"date":"2022-06-28T04:00:06","date_gmt":"2022-06-28T03:00:06","guid":{"rendered":"https:\/\/cryptoslate.com\/?p=245570"},"modified":"2022-07-26T03:17:56","modified_gmt":"2022-07-26T02:17:56","slug":"op-ed-why-crypto-bailouts-are-a-double-edged-sword","status":"publish","type":"post","link":"https:\/\/cryptoslate.com\/op-ed-why-crypto-bailouts-are-a-double-edged-sword\/","title":{"rendered":"Op-Ed: Why crypto bailouts are a double-edged sword"},"content":{"rendered":"

It seems we are coming full circle when it comes to financial contagion. Exposure to bad assets\u2014largely led by subprime mortgages\u2014and derivatives triggered the 2008 global financial crisis. The resulting bank bailouts to the tune of <\/span>$500 billion<\/span><\/a> were so controversial that Bitcoin\u2019s genesis block embedded a related headline as a warning:<\/span><\/p>\n

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Fast forward to today, and Bitcoin has succeeded in leading a decentralized movement of digital assets, which at one point had a market cap of more than $2.8 billion. Things have calmed down since then, but it\u2019s clear that digital assets are here to stay.<\/span><\/p>\n

Bitcoin has seen incredible adoption, from <\/span>legal tender<\/span><\/a> to potentially being included in <\/span>life insurance policies<\/span><\/a>. According to an NYDIG (New York Digital Investment Group) <\/span>survey<\/span><\/a> conducted last year, the majority of digital asset holders would explore such an option.<\/span><\/p>\n

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On this road to adoption, Ethereum was trailing behind Bitcoin, creating an ecosystem of dApps with its general-purpose smart contracts – the foundation for decentralized finance (DeFi) to replace many of the processes seen in traditional financial.<\/span><\/p>\n

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Total value locked TVL in dApps\u2019 smart contracts, predominantly headed by Ethereum. Image credit: DefiPulse.com<\/figcaption><\/figure>\n

dApps covered everything from gaming to lending and borrowing. Unfortunately, a financial contagion crept in despite the automated and decentralized nature of Finance 2.0. The meltdown of Terra (LUNA) was a key accelerator that continues to burn through the blockchain landscape.<\/p>\n

Terra\u2019s Fallout Still Ongoing<\/strong><\/h2>\n

This past May marked the largest crypto wipeout in history, as demonstrated by a TVL reset to levels not seen since January 2021. By all appearances, Terra (LUNA) was becoming Ethereum\u2019s fierce competition, having e<\/span>stablished a DeFi market cap share at 13% prior to its collapse\u2014more than Solana and Cardano combined. Ironically, central banking is what ultimately sparked the fire.<\/span><\/p>\n

The Fed\u2019s interest rate hikes triggered market selloffs, steering DeFi into bearish territory. This bear took a swipe at LUNA\u2019s price, which was collateralizing Terra\u2019s UST algorithmic stablecoin. With the peg lost, <\/span>over $40 billion<\/span><\/a>, along with Terra\u2019s high-yield staking platform Anchor Protocol, melted away.<\/span><\/p>\n

The catastrophic event sent shockwaves throughout the crypto space. It reached Ethereum (ETH), which was already suffering from <\/span>delays with its highly anticipated merge<\/span><\/a>. In turn, market participants that relied on exposure to both assets, largely through yield farming, got closer to insolvency just like Lehman Brothers did in 2008.<\/span><\/p>\n