Swarm Markets: Crypto has a collateral problem What is the solution?

[ad_1]

“Winter is coming.” A phrase many have become familiar with from HBO’s Game of Thrones, hinting at a long, dangerous and turbulent time ahead. In the world of crypto, winter has arrived, and after a year of struggles, there finally seems to be some light at the end of the tunnel. But what will prevent this sort of downward spiral from happening again?

In the crypto world, the domino effect is apparent. When one digital currency crashes, there is a ripple effect that impacts others. Even if they have nothing to do with the one impacted, all cryptos feel the effects. Swarm Markets is a licensed DeFi platform, a unified exchange for securities and crypto.

The platform’s co-founder, Timo Lehe, has over 20 years of fintech experience and experienced the impact of the 2008 financial crisis first-hand. Drawing similarities to that event, Lehes said noticed that the collateral impact that cryptocurrencies have on each other hinders their widespread adoption. Fearing a repeat of what happened in 2008, investors are cautious about investing in the digital world.

Timo Lehes, co-founder of Swarm Markets

So what is the solution ? Lehes told the Fintech Times that introducing real-world assets to the blockchain is essential to solving the collateral problems of cryptos:

Crypto has a collateral problem here is a solution

The events of the past few months that began with Celsius and now continue with FTX have laid bare one of the crypto industry’s biggest failures since its inception. It is the failure of guarantees and transparency.

Crypto started over a decade ago with small, often ideological projects. In the meantime, it has grown exponentially to represent a wide range of ideas, technologies and innovations.

But a unifying subject has been exposed in recent months. Crypto, generally speaking, created a market from scratch of digital currencies and tokens, starting with Bitcoin, then Ethereum and later protocols such as Maker, Uniswap and many others.

domino effect

Although Bitcoin and protocol tokens do different things and have different value cases while supporting key functions for many projects, the market itself has become too highly correlated with itself. When a crypto asset sneezes, the rest of the market tends to catch a cold. There is also a tokenomics issue, where in some cases tokens can be produced or printed at will.

This year, we have seen projects or platforms not providing the right guarantee for its token or underlying services, which are mainly yield-bearing. A lack of transparency, sometimes even a lack of consistency, has exacerbated this problem to disastrous proportions.

Celsius and FTX, through their affiliates, appeared to have over-leveraged their positions and failed to provide insufficient or quality collateral. Inherent failures in systems, risk management and transparency have led to massive meltdowns.

Crises such as Celsius and FTX have done great damage, which will only be repaired if the sector seeks to adopt solutions to this collateral problem. Not only do we need to diversify the type of collateral available within the crypto ecosystem, but the market needs transparency and better protocols to verify that assets are where we think they are.

Disaster prevention

Some companies come up with new ideas such as proof of reserves. However, these solutions only provide singular snapshots rather than providing consistent proof of warranty.

As consumers have limited abilities to truly assess the validity of financial audits, regulators will continue to intervene in order to protect the consumer. Regulators will come to this conclusion the same way they did for banks during the financial crisis and act accordingly. It is up to the industry to be wise in this regard and provide better solutions that will restore confidence in the market.

For us, this means creating collateral trust. The industry needs more confidence in issuing, attesting, certifying and redeeming on-chain collateral to facilitate trading, lending and staking. Invariably, this means greater collaboration with regulators and trusted third parties to oversee ongoing warranty obligations.

History does not repeat itself, but it often rhymes

The platforms at the center of this year’s chaos were offering tokens, products, and services that weren’t tied to any kind of tangible collateral. Highly correlated assets caused leveraged positions to skyrocket, as soon as these tokens came under real pressure from the pressures of the global investment market.

This led to carnage as user trust evaporated, essentially creating digital races on exchanges. It has also led to a resurgence of self-custody by crypto holders.

These are new platforms, but this problem is one that banks faced in the bad old days of casino banking. For years, large financial institutions gambled with customer deposits, while the collateral and risk management requirements imposed by regulators were insignificant.

This ended after the Great Financial Crisis (GFC). Lawmakers and regulators have tightened the banking system with measures such as Dodd-Frank in the US and EMIR or Basel II in the EU and UK.

In a sense, crypto now has its own GFC. The net result will be the same for the sector as it was for the banks in 2008-09, more regulatory oversight, capital and collateral requirements.

Seize digital assets

Amid the noise of high-profile meltdowns and market issues in the crypto space this year, the quiet work of building a deeply important new market for digital assets is well underway.

It is likely that there will be a marked shift from the speculative asset bubbles of the early days of crypto to the institutional adoption of DeFi technologies. In order to digitize assets that connect to the deep liquidity of traditional markets, participants must be able to verify their existence on demand.

A reliable and transparent infrastructure must partner with trusted actors, such as a regulated institution or an auditor, who do not own the collateral but can attest to its existence. Timestamps and records can be facilitated by immutable blockchain technology.

There is already a growing list of large institutions looking to create ecosystems in which digital assets can operate, which could be the defining trend for the future of DeFi.

The use of stablecoins and wider digitization of RWAs is the future of the crypto industry. The endgame will be the unification of traditional asset classes and institutions with modern digital blockchain technologies led by the DeFi sector.

It is through these kinds of innovations, coupled with sensible regulation and the broader integration of RWAs, that crypto can transition from winter 2022 to its crucial role in the technological future of financial infrastructure. world.

[ad_2]