With the help of Derek Robertson
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The cryptocurrency crisis is out of control right now.
It is also very much on the chain. As the general decline in cryptocurrency prices, fans fear that more crypto finance ventures will fail, causing markets to fall even more, this is what makes this crisis different from other financial crises.
Much of the crisis is unfolding in full view of everyone who knows where to look.
This is a big change from, say, the 2008 financial crisis, when huge icebergs of risk were virtually hidden from view by big banks and trading houses.
This is all part of the design of decentralized finance, where transactions are publicly recorded in real time on blockchains, and copies are independently stored on many computers at the same time.
This does not mean that investors, or citizens, or even regulators can understand everything that happens, how it happens. The computer programs that run blockchains record transactions in blocks of data that seem like gibberish to most people who need tools to translate them into a recognizable form.
And just because you can see a transaction going on doesn’t mean you know who’s on either side of it. Even if you do, the member’s full financial status is probably not reflected in the network information. Many activities still take place offline. If, say, a crypto-currency hedge fund is facing bankruptcy, its fate may depend on a desperate behind-the-scenes effort to get an old-fashioned dollar loan sent through the banking system.
But there’s a lot to be learned from what’s happening online. It is a dynamic that influences how the market behaves in real time, as well as the ways and speed with which regulators – or anyone else – can analyze what happened during the crisis after the fact.
In traditional finance, regulators and the public learn about the state of the industry in several ways. After the 2007–2008 global financial crisis, the Fed began conducting annual stress tests on major banks, reviewing their balance sheets to see if the banks were ready to weather the crisis. Public companies publish SEC disclosures on a quarterly basis or, for certain important events, within a few days. If something goes wrong, the regulators can swoop in later with subpoenas.
In both traditional and crypto finance, industry rumors and news reports can add to the picture of risk during a crisis.
In crypto, however, there is also chain analysis, which has spawned a sub-industry of companies that read the blockchain and report what they see there. Some of these firms have already produced follow-up reports that shed light on the collapse of the algorithmic stablecoin Terra last month. One report from Chainalysis measured the impact of the Terra crash on belief in stablecoins in general by tracking the spike in redemptions of other stablecoins—users were dumping them—around the time of the crash.
Separate Nansen’s reportanother blockchain analytics firm claims evidence on the network undermines the theory that Terra’s collapse was the result of a financial attack by one sophisticated player.
On-chain analysis is also happening in real time during this week’s market turmoil, which began when crypto lender Celsius suspended withdrawal.
Such transparency is theoretically good for the market. But this does not necessarily improve the functioning of the market. This is partly due to the fact that not every user is known: they are all identified by strings of numbers and letters, but only some of these strings are associated with real objects.
In the case of Celsius, the market can see that it has placed Ethereum and synthetic bitcoin as collateral for the loan on the MakerDAO DeFi platform. As Ethereum and Bitcoin prices fall, the risk of a loan entering liquidation territory without additional collateral increases. Currently, the market is monitoring the fluctuations of the loan collateral cushion in real time.
Alex Thorn, head of research at Galaxy Digital, a digital asset financial services company, said the dynamic represents a marked departure from traditional finance, where less information is available about the state of the system.
“In a stress test situation, the Fed could have direct access to the data,” said Thorne, who previously worked at Fidelity. But in the event of a crypto crisis, he said, “the whole world could see Celsius’s makerDAO vault.”
In some cases, this replaces the general atmosphere of uncertainty that tends to prevail during financial crises with a more acute form of uncertainty. When market participants see a large loan approaching liquidation territory, Thorne said, they tend to wait and see what happens to it. “It makes the market freeze a bit.”
As of Friday afternoon, the market is facing a growing number of places to look for online risk. Hong Kong lender Babel Finance temporarily suspended withdrawal today, and hedge fund Three Arrows Capital is reportedly battling for stay afloat while the market is watching closely company-owned addresses.
At the very least, investors who are being hosed down can take comfort in the fact that their pain creates a rich dataset that will help the public understand blockchain funding for years to come.
Last night the FTC voted to publish a AI usage report to mitigate online harms such as scams and illegal content, here are a few key takeaways as the commission takes a more aggressive stance on tracking technology-related policy issues in its second year under its chairmanship and technology watchdog. Lina Khan:
- Overall report deeply skeptical on the use of AI tools to moderate the Internet, and ultimately more concerned about their unacknowledged use by individuals: tools even for the important purpose of harm reduction.”
- In addition, regulators are concerned that the instruments themselves may be too rudimentary even to achieve their stated goals, writing that “the datasets that support them are often not robust or precise enough to avoid false positives or false negatives.”
- The report calls more transparency from the companies that develop these tools, stating that “Seeing and allowing research behind opaque platform screens (in a way that respects user privacy)” is necessary to integrate them into the overall policy framework.
And when it comes to legislation, the FTC is blunt: “Congress should generally steer clear of laws that require, involve, or pressure companies to deploy AI tools to detect malicious content,” and that any initial legislative focus should prioritize transparency. and responsibility.” – Derek Robertson
Prada and Bulgari jewelry house both recently announced projects of the metaverse, the latest developments in nascent cozy relationship between the world of fashion and VR.
Prada launches an NFT collection that will tie into real-world gender-neutral clothing and customer perks, as well as a Discord server “where Prada fans can discuss fashion, art, film, music and Web3.” Bulgari’s offer includes NFTs combined with extravagantly expensive ruby and emerald necklaces, as well as one digital piece of jewelry that the company touts as “the first NFT jewel, an intangible creation that transcends materiality.”
The concept of the “digital twin” is a key argument in favor of NFT proponents who see it as an element of online technology. “Sustainable Identity” they say that blockchain technology allows. As for why expensive companies like Prada and Bulgari are so interested in space, there is a much less shaky explanation. At the moment the metaverse is pretty much tentative, they don’t really need that much to Beyond planting their flag and aligning their brand with the forward-thinking rich is something both companies have been doing for a long time. – Derek Robertson
Stay in touch with the entire team: Ben Schrekinger ([email protected]); Derek Robertson[email protected]); Konstantin Kakaes (ur.[email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.
Ben Schrekinger writes for POLITICO on technology, finance and politics; he is a cryptocurrency investor.