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#16: Double-Digit Market Drops are Back. CeFi is not DeFi

#16: Double-Digit Market Drops are Back. CeFi is not DeFi

GM Architects,

A volatile Thursday for the crypto (and financial) ecosystem made most assets end in the red this week. Arch Ethereum Web3 token traded 11.7% lower than last week, while the Arch Blockchains token fell by 12.4%. Bitcoin lost 9%, while Ethereum fell by 13%.

In this newsletter edition, we examine the CeFi and DeFi landscape (and share why working towards greater decentralization is more important than ever), look at the market movers, and investigate what wrapped assets are - a core enabler of the Arch Blockchains token - and how they work.

🏦 Worst first half for TradFi in 52 years, crypto feeling the heat

TradFi markets had the worst six months in 52 years, with inflation mounting pressure on markets (and citizens) across the globe.

The crypto space also felt the strain. Bitcoin is trading for under $20.000. The price drop triggered a $200 million liquidations in futures tracking bitcoin and ether in what some analysts are calling a short-squeeze.

The current market cap of all cryptocurrencies is around $850 billion. In November 2021, the total market cap was nearly $3 trillion, a  70% drop since last November.

However, countries like El Salvador continue their DCA strategy adding 19 bitcoins more to their wallet. VC funding for the crypto ecosystem continued at a healthy pace, and while it fell compared to early this year, it's still over 89% higher than last year, according to TechCrunch.

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📉 Web3 traded 11.7% lower than last week

While it was a turbulent week for markets, the Arch Ethereum Web3 token outperformed Ethereum once again.

  • Compound (COMP) experienced a second positive week in a row. Last week Celcius, the crypto-lending platform on the brink of insolvency, repaid Compound $10 million worth of DAI. Compound Labs, the team behind Compound, released code for a multi-chain lending protocol dubbed Compound III this week. Compound III is intended to be a governable protocol that’s both affordable in capital and transaction fees. According to a post made by Jared Flatow, Compound Labs’ vice president of engineering, it’s doing this by including a single borrowable base asset - with all other assets collateralized - to reduce risk and improve capital efficiency.
  • The Sandbox (SAND) had another positive week following last week’s good news. This comes after the metaverse integrated with Coinbase wallet and enabled LAND deployment on the Polygon network.
  • Synthetix (SNX) was the underperformer after a week where it grew by more than 70%. The correction came after the token failed to move above the resistance area after several attempts to break it. However, there seems to be a bullish action forming underneath the surface, SNX traded almost 2% higher in the last 24 hours, and the number of wallets and active users seems to be maintaining.

⛓ CHAIN fell by 12.4% this week

All tokens in the Arch Blockchain token traded negatively after a turbulent week shaped by futures liquidations and selling pressures.

And while Solana's price suffered, the protocol is working on more developments than ever. SOL token holders can earn rewards on Coinbase. DeFi insurance is being developed to protect Solana users against possible exploits.

Anatoly Yakovenko - Solana Labs co-founder - announced last week the launch of their new mobile phone that will run on a Solana Mobile Stack (SMS) operating system and feature a marketplace for Web3 apps.

🔮 CeFi is not DeFi

In the fallout of the Terra debacle, notable crypto skeptics, including Paul Krugman, have piled in to denounce the entire ecosystem as a scam. In contrast, others like Scott Galloway (Prof. G) have provided more nuanced criticism.

Beyond the pundit’s opinions, the reality recent market woes have put the entire ecosystem under extraordinary stress, and some of its weaknesses have shown through the seams.

CeFi is not the new DeFi

CeFi is part of the crypto ecosystem — a centralized part, but part of it nonetheless. Still, recent developments have shown that CeFi has a lot more in common with traditional finance than the rest of their more decentralized and non-custodial crypto peers.

Let's look at some CeFi players: Most are an organization with a board of directors, a centralized system that regulates the decision-making, and a way of doing business that's pretty much identical to banks and financial institutions.

Celsius holds custody over its users’ funds off-chain, which means users lose control over their assets and have no choice but to trust that Celsius will keep their deposits safe. The entire ethos of crypto is lost: users are not in control of their private keys, therefore, they’re not in control of their funds. Assets are kept off-chain and therefore there is no way to verify how Celsius is raising those funds.

It turns out, Celsius was delivering on its promise to pay near 20% yields by putting users’ assets in risky and illiquid investments, and by lending out to funds like 3AC. The bear meant that many of those investments soured while the 3AC liquidations put pressure on their core.

Who suffers? Users, who had no way of knowing what Celsius was doing with their funds or verifying the health of the lender. What’s worse, their withdrawals were unilaterally limited. They had no say in that decision.

This also extended to other CeFi platforms, which introduced withdrawal limits to protect themselves, again with no decentralization in the decision-making process.

Ultimately, bailouts for troubled CeFi project has come from investors like Alameda and other CeFi players like FTX. Just like institutional or government bailouts come out when TradFi is in distress.

CeFi is just TradFi, only with a different set of assets.

Caveat emptor — What sounds too good to be true, usually is. Source:

DeFi as a spectrum

Using smart contracts does not automatically make a financial application a DeFi one. Decentralization (the De in DeFi) can be expressed across a continuum.

We've witnessed that greater decentralization has afforded projects greater resilience (and perhaps more balanced risk tolerance).

The Terra Foundation had discretionary power to decide how to defend UST's peg, but they failed. Now Tron has deployed waves of capital to protect USDD. Does their discretionary control over a digital asset do it any favors?

The case with Solend is another example; a single voter with 90% power passed a proposal to take over a whale's fund, and uproar across the community ended up reversing it.

More "decentralized" finance projects, like Maker, have been more resilient despite market pressure, successfully passing votes to decrease their contagion risk; others like LIDO are seeking ways to avoid centralization in their governance.

For DeFi to succeed, we must push toward greater decentralization. Work towards an ecosystem where decisions work democratically and projects can be controlled by large numbers of participants instead of just a few.

Often, greedy eyes ignore what they know sounds too good to be accurate and do not call things by their names.

🎁 Learn more about wrapped tokens and assets

If you've spent any significant time in crypto, you've probably heard of wrapped tokens, or maybe you've traded wrapped Ether (wETH) or wrapped Bitcoin (wBTC), without really giving the 'w' in their symbol a second thought. Wrapped tokens are everywhere, including our Arch Blockchains token (CHAIN)

--> 📚🤓 Take a deep dive into wrapped tokens, how they work, and the risks and advantages of these types of assets.

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Disclaimer: The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations. The views reflected in the commentary are subject to change without notice.