A Postmortem on 2022’s DeFi Liquidity Crunch and Sprocket’s Revolutionary Potential

The world of decentralized finance has seen many ups and downs over the past year, as a sustained pricing decline since the spring has left users uncertain of the future. Despite the 2022 liquidity crunch in the digital asset market, long-term investors, blockchain economists, and visionary thinkers still believe in the transformative power of the decentralized economy, some more than ever.

For the layperson or amateur investor, cryptocurrency liquidity means the ease with which digital currency can be converted into another digital asset or cash without impacting the value. Liquidity is important for all tradable assets — low liquidity means the market is especially volatile, while high liquidity means there is a stable market with few price fluctuations.

This past spring, the global DeFi market began to face serious challenges when several crypto lending firms filed for bankruptcy due to their inability to liquidate assets for customers. In addition to the recent FTX fallout, one of the most notable examples of this phenomenon was Celsius, a cryptocurrency lending company previously led by Alex Mashinsky. During its peak, the company boasted $20 billion in assets from 1.7 million customers — many of whom were attracted to the 10 percent APY rate offered on stablecoins, and to Celsius’ promise of “military-grade security and next-level transparency.”

However, Celsius made a series of risky loans and investments in an attempt to chase even higher yields for its customers. As the bear market arrived due to delays in the Ethereum merge and other complicating factors, the price of stETH began to fall, and Celsius’ illiquid stETH holdings dropped rapidly in value. When Celsius’ depositors began asking for their money back, Celsius had no liquidity to keep up with withdrawal requests; the company announced a pause on all withdrawals in June 2022 and then filed for bankruptcy a few weeks later.

“@CelsiusNetwork is pausing all withdrawals, Swap, and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community,” said Celsius in a tweet.

Furthermore, these tumultuous times have given federal regulators even more ammo to push for crypto regulation, with a focus on stablecoins. The Federal Reserve Chair Jerome Powell said that he had “no intention” of banning cryptocurrency in the U.S, and investors could look forward to more protections in the future. More regulation could mean more stability in a notoriously volatile market. This could also potentially protect long-term investors by preventing fraudulent activity. With that being said, regulation has the potential to turn the cryptocurrency market into everything it opposes philosophically. It is a difficult needle to thread.

“Sensible regulation is a win for everyone,” says Ben Weiss, CEO and co-founder of CoinFlip, a cryptocurrency buying platform and crypto ATM network. “It gives people more confidence in crypto, but I think it’s something we have to take our time on and we have to get it right.”

There are emerging financial platforms that embrace both new, DeFi systems as well as traditional banking models, such as Sprocket. Sprocket’s hybrid banking platform will feature an integrated experience consisting of traditional online banking services and a full-service crypto trading and staking system; users can deposit their paychecks and trade crypto in one place. Sprocket welcomes innovations in blockchain-enabled banking technology while embracing the security and value of traditional banking services.

By making substantial strides toward modernizing financial services, Sprocket, under the guidance of Jesse Lund, is poised to usher in the next era of cryptocurrency – one that is sure to be less plagued by the liquidity crunch we saw in 2022. “It’s an emotional balance between sound regulatory oversight of and the wild west of crypto,” says Lund, “but Sprocket believes that some regulation is necessary for widespread adoption of the cryptobanking model we’re building.” By converging conventional banking with decentralized financial services, Sprocket aims to make crypto safer for general commerce while simultaneously bringing financial services to the remotest parts of the world. We look forward to seeing Sprocket fulfill its destiny as a paradigmatic example for the industry, straddling the worlds of old and new, regulated and deregulated, centralized and decentralized.”

NO FINANCIAL ADVICE: This article is provided for informational purposes only and should not be interpreted as investment advice. All investments involve the risk of loss. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.

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