A recent downturn in the broader cryptocurrency landscape has identified several flaws inherent in evidence-based (PoS) networks and Web3 protocols. Methods such as connection / disconnection and lock-in periods were structurally built into many PoS networks and liquidity portfolios with the aim of reducing the overall bank run and promoting decentralization. However, the inability to withdraw money quickly has led many to lose money, including some of the most prominent cryptocurrencies.
At their core level, PoS networks like Polkadot, Solana, and the ill-fated Terra rely on certifiers who verify transactions while securing the blockchain by keeping it distributed. In the same way, liquidity providers from various protocols offer liquidity over the Internet and improve the speed of each cryptocurrency – ie. the speed at which the symbols alternate across the cryptographic path.
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In its forthcoming report “Web3: The Next Form of the Internet”, Cointelegraph Research discusses the problems that distributed finance (DeFi) faces in the light of the current economic background and assesses how the market will develop.
The unstable stable
The Terra meltdown raised many questions about the sustainability of cryptocurrency lending protocols and, most importantly, the security of the assets that platform users deposit. In particular, Anchor’s cryptocurrency code, the center of Terra’s ecosystem, was struggling to cope with the TerraUSD (UST) depeg, TerraUSD’s stablecoin algorithm. As a result, users lost billions of dollars. Prior to the intervention, Anchor Protocol had a total value of more than $ 17 billion blocked. As of June 28, it stands at almost $ 1.8 million.
The properties placed in Anchor have a three-week lock-in period. As a result, many users were unable to exit LUNA – which has since been renamed the Luna Classic (LUNC) – and ICT positions at higher prices to reduce their losses in the crash. When the Anchor Protocol collapsed, the team decided to burn the locked deposits, raising the liquidity outflow from the Terra ecosystem to $ 30 billion, which resulted in a 36% reduction in the total TVL on Ethereum.
Although many factors have led to Terra’s collapse – including withdrawals from ICT and volatile market conditions – it is clear that the inability to remove funds quickly from the platform is a significant risk and access barrier for some users.
To fall on Celsius
The current bear market has already shown that even managed investment decisions, carefully evaluated and made by leading market participants, are becoming akin to gambling due to lock-in periods.
Unfortunately, even the most thoughtful, calculated investments are not immune to shocks. The stETH symbol is typed by Lido when Ether (ETH) is played on its platform and allows users to access a 1: 1 short symbol of Ether that they can continue to use in DeFi while their ETH is at stake. Lending rules Celsius pledged 409,000 stETH as collateral for Aave, another lending rule, to borrow $ 303.84 million in stablecoins.
However, as stETH was released from Ether and the price of ETH fell in a contraction in the market, the value of the collateral also began to fall, which has raised suspicions that stETH Celsius has been wound up and that the company is facing bankruptcy.
Given that there are 481,000 stETHs available on Curve, the second largest DeFi lending policy, the subsequent termination of this position would cause large fluctuations in token prices and further stETH depeg. Thus, credit lock-in periods not only act as an additional risk factor for an individual investor, but they can also sometimes trigger an unpredictable scenario that affects the broader DeFi market.
3AC in trouble
Three Arrows Capital is also in jeopardy, as ETH’s fall in prices allegedly led to the liquidation of 212,000 ETH, which was used as collateral for its $ 183 million debt in stablecoins and put the venture fund on the verge of bankruptcy.
In addition, the inability of loan agreements to deny the liquidation recently prompted Solend, Solana’s most prominent lending policy, to intervene and propose to take over the whale wallet “so that the liquidation of OTC can be carried out and Solana can be pushed to its limits. In particular, the liquidation of the $ 21 million position could lead to rapid bankruptcy if the price of SOL were to fall too low. The original ballot was pushed through with another whale wallet, which contributed 95.1% of the total vote. Even though another vote overturned this decision, the fact that developers violated the principles of decentralization, and revealed its lack of it, raised fears among many in the cryptocurrency community.
In the end, the lack of flexibility with connection / disconnection and locked liquidity funds can deter future contributions from joining Web3 unless they have a strong understanding of DeFi design and comparable risks. This is exacerbated by the collapse of “too big to fail” protocols such as Terra and the uncertainty surrounding hybrid venture capital / hedge funds such as Three Arrows Capital. It may be time to evaluate some other lock-in solutions to allow for sustainable returns and real mass consumption.
This article is for informational purposes only and does not represent investment advice or investment analysis or offers to buy or sell financial instruments. Specifically, the document does not replace individual investments or other advice.
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