Crypto-contagion is spreading fast

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One of the consequences of a potential collapse is already playing out. After withdrawals halted, crypto exchange Gemini, whose yield farming product sits above Genesis, announced that its Earn clients would no longer be able to access their funds.

On November 22, the exchange explained that it was working to find a solution, but until then, $700 million in client funds would remain tied up. If Genesis were to go bankrupt, some of these funds may never be returned, just like at FTX, and clients of other Genesis-related exchanges may suffer the same fate.

The silver lining is that Genesis deals primarily with institutional clients: family offices, high net worth individuals, hedge funds, etc. So in the event of bankruptcy, although confidence in the industry may be torn apart and the ripple effects may put other businesses in financial difficulty, the immediate impact on ordinary people would not be as severe as with FTX.

Max Galka, founder of blockchain analytics firm Elementus, says blockchain data suggests the company is also “an order of magnitude less closely tied than FTX with big industry players. there are repercussions, a collapse is unlikely to have the same cascading effects.

The potential collapse of Genesis would not be as wide, says Joe Flanagan, co-founder of decentralized lending protocol Maple, because the financial shortfall is much smaller than at FTX. He also says that the bankruptcy process would likely be simpler due to the clear demarcation between internal divisions at Genesis, which means the distressed loans division could be spun off.

The biggest impact will likely be felt in the crypto lending market itself; in the same way that the collapse of FTX drew attention to the benefits of decentralized exchanges, the Genesis situation has the potential to push people towards decentralized lenders.

Instead of relying on an intermediary to lend their cryptocurrency responsibly and to keep enough money on hand to meet withdrawals, decentralized alternatives allow customers to see exactly what is happening to their crypto. This is an example of what is known as decentralized finance, or DeFi.

Most decentralized lenders also exclusively support over-collateralised loans, i.e. borrowers are required to lock up assets worth more than what they are borrowing, so the risk of default is low. Genesis, on the other hand, would offer riskier and unsecured loans, which could have contributed to its current financial difficulties.

Harrison describes lenders like Genesis as black boxes that offer no transparency of the DeFi approach. He says there are two potential outcomes to the current situation: Either the DeFi philosophy around transparency and collateral will have to be adopted by centralized lenders, or decentralized lenders will start stealing from customers. Galka goes so far as to say that crypto lending by centralized services is basically done, following what happened to lenders like Genesis.

Meanwhile, the FTX fallout continues. While the effects on Genesis and other FTX-related companies (like BlockFi and Voyager Digital) are starting to take shape, it’s possible that many more are quietly sitting on steep losses, Galka says. It may take a year or more for things to change before we really know how far the contagion has spread.

Updated 12/14/2022 11:00 AM ET: This article has been updated to correct that Brad Harrison leads the team behind decentralized lending protocol Venus, but could not find the protocol itself .

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