When there is a crash on the track, smoke may pass through!
There’s a very small chance that you know that this is a quote from the 90’s American sports action movie, ‘Days of Thunder’, which featured Tom Cruise in the driver’s seat. What does a Nascar racing movie have in common with today’s cryptocurrency? More than you think.
NASCAR race cars are no different, but small details can make all the difference when it comes to performance. All of the supporting teams are experts in their respective fields, but slightly better skills can make huge gains in efficiency during pit stops where every nanosecond counts. And while the drivers are arguably the stars of the show, it is their driving that brings the entire operation together to achieve fame and glory.
In crypto, all teams perform in tournaments in the same industry, playing by the same rules, with the goal of getting to the finish line before everyone else. Many blockchains or applications are similar at a high level, but small tweaks and tweaks create advantages in scalability, decentralization, or security. Developers are working around the clock to make those tweaks and fix critical bugs to gain market share from competing blockchains. The founders or co-founding teams are the ones who lead the organization with their eyes on the prize.
If you’ve ever watched a NASCAR race, you’ll know that crashes happen all the time. And anyone who’s been around the block in our industry knows that projects that once seemed indomitable can suddenly and dramatically collapse. After an accident, it’s important to analyze why it happened and what we can do to prevent it from happening again – or at least find out how we can minimize the damage.
There are two major incidents in Days of Thunder, with two very different outcomes. When approaching the wrecked and destroyed vehicles ahead on the track, team boss Tom Cruise instructs to “drive through the smoke.” The first time our hero does this, he ends up in the hospital. The second time around, he leads him to victory.
Crypto has also had two major crashes this year, starting with the Terra-Luna crash back in May and now the ongoing FTX debacle. During the first meltdown, everyone was unprepared, inexperienced, and scared. Many companies have had near-death experiences and some have not. Those who survived either cherished the lessons learned and improved their game on every level or continued with their same old routine, eliminating the chances of another black swan happening right after another.
We are all still walking through the smoke, the darkness is getting darker and there is no end in sight. Who is going to clear the smoke and come out unscathed? What cars will come out with a few scratches? Which one will crash and burn? We won’t know for sure until it’s over, but given the way some companies responded to the first Terra-Luna crash, we can make an educated guess.
What might happen next
Centralized exchanges will have a hard time moving forward since they hardly make any substantive changes after the first crash. Most of them continued as usual, lending assets using poor risk management and controls. The few centralized lending platforms that still exist are also having a hard time because they haven’t reintroduced risk enough under the false assumption that a second black swan event won’t follow soon.
The strongest players include blockchain projects that prudently manage their treasury without chasing short-term returns, focusing on development and expanding their runway. Independent guardians who prioritize strengthening their core infrastructure to provide a safe haven for all other players also have a good chance of emerging unscathed.
Amidst all the uncertainty, one thing is clear: a combination of powerful blockchains and guardians will lead the race. where these two are overlapping. True, on-chain stacking backed by the security that only an independent, fully licensed custodian can provide will help the best projects and their dedicated communities get through the tough times ahead and maybe even thrive once the smoke clears.
Bitcoin and Proof of work The model will always be the gold standard in the industry, however Proof of stake Blockchains are likely to thrive as they attract more attention due to their local throughput features, and as a breeding ground for rapidly expanding developer communities. The role of independent custodians is to provide secure access to parties that wish to contribute to this blockchain through staking solutions in a way that ensures that all stakeholders retain full control of their assets and private keys.
Full transparency of transactions across the chain is the only way forward from this point forward. If any storage operation is performed without providing the transaction ID for a successful on-chain authorization to an authenticator, this is not a true sharing operation but should be considered as a lending solution. And if we as an industry want to learn from our past mistakes, arcane mechanisms that don’t verifiably establish where and how your assets are deployed can get ugly in a heartbeat.
The only way through the smoke is the chain.