Top 10 Crypto Moments of 2022: A Glimmer of Hope Amidst Heart-Stopping Turmoil.

The Russia-Ukraine conflict has had a significant impact on the global market this year, including the cryptocurrency industry. Cryptocurrencies have become a focal point in this war.

Within days of the outbreak of the conflict, the official Twitter account of the Ukrainian government posted a message that included Bitcoin and Ethereum wallet addresses, hoping that donors could donate BTC and ETH. As soon as this tweet was sent out, it immediately caused chaos, with Ethereum co-founder Vitalik Buterin warning that the Twitter account may have been hacked.  

However, the Ukrainian government's digital transformation department subsequently confirmed that Twitter had not been hacked and the post was indeed accurate, as they do indeed hope to provide funding for war relief work by accepting cryptocurrency donations.  

Later, donations poured in like a tide, and the Ukrainian government raised over $30 million worth of BTC, ETH, DOT, and other digital assets within three days. Someone even donated a CryptoPunk NFT.  

The initial fundraising campaign was just one of the historic moves by the government to embrace cryptocurrency during times of crisis. On March 26th, the Ukrainian Ministry of Digital Transformation also launched an NFT museum, selling NFTs that record war events to raise more funds. 

At this annual moment, the role of cryptocurrency has demonstrated the power of "borderless" more clearly than ever before. Ukraine's requirement for donations to be made in cryptocurrency is a world first, but it is certain that in the future, we will also see other countries adopt cryptocurrency.

Biden signs executive order on cryptocurrency regulation  

This year, the United States has raised their regulation of cryptocurrency to a new level. To be honest, the way the US government regulates cryptocurrency has always been scattered, even during the best times in the crypto market. But now it's hard to imagine an industry begging the government for a clearer set of rules.

Obviously, the administrative department is still figuring out what "digital assets" are and how to regulate them. Are they securities? Or commodities? Perhaps they resemble securities in some ways, but not in others. Some may be commodities, others securities, and still others currencies... but what are the standards for making these distinctions?

Is Congress studying this? Who is actually setting the rules?

That person is President Biden.

After 13 years since the birth of Bitcoin and three administrations in the United States, President Biden issued an executive order directing nearly all federal agencies, including cabinet departments, to ultimately propose a comprehensive plan for regulating and enforcing cryptocurrency in the United States. When Biden's order was finally signed in March, it was widely seen as good news for the crypto industry. Biden's executive order is far from the harsh approach that many feared, it is simply a research directive that requires each agency to develop a plan once and for all and submit it to the White House.  

Although there is almost no objection to the need for a comprehensive "Cryptocurrency Rulebook", the government agency (i.e. Congress) authorized to write the "Rulebook" has not passed it hastily. As it stands, cryptocurrency can only be regulated within the existing legal framework.

Hackers stole $550 million from Ronin Network

The encryption industry suffered several high-profile hacker attacks in 2022, but to some extent, the biggest one was the attack on the cross-chain bridge Ronin of the blockchain game Axie Infinity, which has gained popularity.

The attacker was later confirmed by US law enforcement agencies to be Lazarus Group, which is sponsored by the North Korean government. They used phishing emails to obtain five of the nine Ronin validators, allowing them to steal funds, including 173,600 ETH and 25.5 million USDC, with a total value of approximately $551.8 million. 

The strangest detail of the entire incident is that the hack occurred six days before the news broke, and no one was managing the cross-chain bridge for nearly a week until the funds ran out. Although this suggests that Sky Mavis, the developer of Axie Infinity, and its partners lacked attention to the cross-chain bridge, part of the reason for the slow response may also be due to the deteriorating market conditions that led to the cross-chain bridge not being widely used. 

The Ronin incident marks the beginning of a series of attacks by the Lazarus Group on the cryptocurrency industry. In June, Layer-1 network Harmony lost about $100 million due to a similar attack, and Arthur Cheong, founder of DeFiance Capital, also became a victim of targeted attacks by the Lazarus Group, losing a pile of high-value Azuki NFTs.  

Although most of the stolen funds are still missing, about $36 million has been recovered with the help of blockchain analysis company Chainalysis and cryptocurrency exchange Binance.

Yuga Labs launches Otherside

During its heyday, Terra was one of the largest cryptocurrencies in the world by market capitalization, with a total ecosystem value exceeding $40 billion USD.

Terra achieved amazing growth from the end of 2021 to the beginning of 2022, mainly thanks to the success of its native stablecoin UST. Unlike most stablecoins, UST is not fully collateralized: it relies on algorithmic mechanisms to maintain its peg to the US dollar. This algorithmic system allows users to mint new UST tokens by burning LUNA tokens, or to burn UST to exchange for new LUNA tokens. 

The mechanism of UST helped Terra network expand during the bear market, as many investors exchanged unstable cryptocurrencies for stablecoins as a "safe haven" to avoid the impact of price drops. At this time, UST was a particularly attractive choice because Anchor Protocol, a lending platform on Terra, provided a 20% yield for UST lending. As market participants flocked to UST to earn profits, they increasingly destroyed LUNA, thereby pushing up the price of LUNA.

The Rise of Terra - coupled with the strong support of Terra founder Do Kwon on social media - seems to have given investors a sense that Terra will not be affected by the downward trend in the cryptocurrency market. In turn, UST seems to be more attractive.

On May 7th, 2022, a series of massive sell-offs challenged the pegged exchange rate of UST, sounding the alarm for Terra. After briefly recovering from the decoupling of UST, two days later, UST lost its peg again, triggering a widespread "bank run". UST holders were eager to redeem their UST for LUNA tokens, greatly increasing the supply of LUNA, which in turn led to the devaluation of LUNA, causing even more UST holders to redeem. By May 12th, the trading price of UST had fallen to $0.36, while the price of LUNA had fallen to a fraction of a cent. 

The collapse of Terra has led to further collapse of the cryptocurrency market, but the damage has not stopped there. The collapse of Terra triggered a serious liquidity crisis, hitting major participants such as Celsius, Three Arrows Capital, Genesis Trading, and Alameda Research. Legislators from around the world have also condemned the risks of stablecoins, especially the risks of algorithms. In many ways, Terra is the biggest failure of DeFi (decentralized finance), and the consequences of its collapse are slowly being revealed.

Celsius, Three Arrows Capital caught in liquidity crisis  

When the Terra ecosystem crashes, we know the consequences will be terrible, but we don't know who it will affect or how long it will last. Terra crashed in May, wiping out billions of dollars in value. But by mid-June, Do Kwon's "labor" had entered the centralized crypto market, and that's when things really got worse.  

On the evening of June 12th, Celsius, a leading centralized crypto lending platform, warned its customers that it had temporarily suspended withdrawals. People immediately realized that this was not good news. Celsius had invested in Terra, and when the project plummeted, it ignited a flame that CEO Alex Mashinsky fanned by trading on the company's books without authorization. As its investment became insolvent, it triggered a chain reaction among a familiar cast of characters. Celsius borrowed from decentralized platforms such as Maker, Compound, and Aave, but also provided large loans to centralized crypto entities such as Genesis, Galaxy Digital, and Three Arrows Capital. Some crypto entities (excluding Galaxy) then turned around and lent the loans again, and so on. It may take years to see the complete custody chain around all transferred assets, but there are signs that, despite these companies' valuations reaching billions of dollars, they may just be transferring the same funds over and over again. 

The next one is Three Arrows Capital. Rumors about Three Arrows Capital's bankruptcy began to spread within days of Celsius announcing bankruptcy, and its co-founders Su Zhu and Kyle Davies did not publicly respond. Now, they are believed to owe about $3.5 billion in debt after defaulting on a series of loans. Other companies such as Babel Finance, Voyager Digital, and BlockFi have also been hit by the spread of Terra, which will eventually affect Sam Bankman-Fried's FTX empire (even if it takes several months).

The liquidity crisis in June was a terrifying reminder of the dangers of centralized trading platforms and the extent to which these so-called "custodians" actually hold client funds. Hey, this is the core value proposition of CeDeFi - if you want attractive DeFi returns but don't have the time, knowledge, or patience to do it yourself, you can let custodians do it for you. But you must be able to trust them to some extent, and they need to be transparent about what they're doing with your money.

The liquidity crisis has also tested the boundaries of "terms", which has always been a thorn in the eyes of users trying to interact with any given product. It is commendable that Celsius clearly states that it will not act as a custodian of customer funds, but rather treats customer deposits as a "loan" to the company, which can then be freely traded, mortgaged, borrowed, transferred, etc., while clarifying that "if Celsius goes bankrupt...you may not be able to recover or regain ownership of such digital assets, except for your rights as a Celsius creditor under any applicable law, you may have no legal remedies or rights."

US Treasury Department sanctions Tornado Cash

Tornado Cash is a privacy protection protocol that helps users obfuscate their on-chain transaction history. On August 8th, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury announced that the protocol has been added to the sanctions list. The agency claimed in a statement that cybercriminals, including the Lazarus Group mentioned above, use Tornado Cash as a money laundering tool. 

Circle and Infura, among other cryptocurrency companies, have taken immediate action to blacklist Ethereum addresses that have interacted with Tornado Cash in order to comply with sanction regulations. Some DeFi protocols have also blocked wallets that have interacted with Tornado Cash from using their services on the front end. 

After OFAC's announcement, the Dutch Fiscal Information and Investigation Service arrested Tornado Cash core developer Alexey Pertsev on suspicion of aiding money laundering.

Tornado Cash sanction order is unprecedented because it marks the first time a government agency has sanctioned open source code. Some crypto enthusiasts have taken this opportunity to express concerns about Ethereum's ability to maintain censorship resistance.

It is worth noting that the cryptocurrency community has taken various measures to counter the sanction order, with the most famous being Coin Center's lawsuit against OFAC. The outcome of this case could have a huge impact on the future of cryptocurrencies, as it will determine whether the US government has the right to sanction other decentralized projects.

Ethereum finally "merges"

There is too much bad news in 2022, but Ethereum has brought some comfort to the industry in the summer, as it finally seems to be preparing for a "merge" - transitioning from a Proof of Work (PoW) mechanism to a Proof of Stake (PoS) mechanism - improving energy efficiency by 99.95% and reducing carbon emissions by 90%.

After the liquidity crisis in June, investors' speculation about the Ethereum merger was enough to lift the market out of despair, while discussions about the proof-of-work fork of the network ignited more investors' enthusiasm.

Finally, the merger was officially completed on September 15, 2022. The merger is hailed as the largest cryptographic technology update since the launch of Bitcoin, and Ethereum developers are widely praised for its success.  

Merging greatly improves Ethereum's economic model, so much so that ETH briefly turned to deflation, and it may lay the foundation for mainstream institutions eager to profit in the crypto market to adopt ETH. Therefore, if the crypto market wants to enter a new bull market, Ethereum's opportunity to lead the race is no less than any other project. 

FTX Great Collapse  

By the fall of 2022, the temporary difficulties in the world of encryption had almost become the norm. Terra collapsed, more than a dozen well-known companies went bankrupt throughout the summer, the US Treasury Department sanctioned the decentralized protocol Tornado Cash, and so on. However, despite the fact that we were almost numb, the most shocking disaster of 2022 was saved for last. 

Just a month ago, FTX was still at the top of the world. This cryptocurrency exchange platform, headquartered in the Bahamas, was known for spending a lot of money to promote its image, making its name "FTX" as well-known as cryptocurrency. Obviously, FTX targets US retail consumers, linking itself to sports events, and reaching sponsorship agreements with sports stars such as Tom Brady and Steph Curry, and acquiring the naming rights of the Miami Heat's home court in the NBA at a high price, replacing it with its own name, and promoting it heavily at the Super Bowl.

Its CEO, Sam Bankman-Fried (hereinafter referred to as SBF), makes a special effort when visiting political figures and regulatory agencies in Washington, D.C. to replace his daily T-shirt and work shorts with a shirt and tie to assure them of FTX's credibility and commitment to cooperation between regulatory agencies and the industry in formulating regulatory rules. He graced the cover of a magazine, received former heads of state at FTX events, and showcased his charitable tendencies, insisting that his ultimate goal is to make as much money as possible so that he can donate all of it to public welfare. 

Therefore, FTX became a bombshell in early November. There were rumors that Alameda Research, an unofficial sister company of FTX (also founded and completely controlled by SBF), had insufficient liquidity, which could put pressure on FTX. This triggered a "bank run" on the FTX platform, leading to a liquidity shortage. Most people believe that FTX "lent" customer funds to Alameda, which lost $10 billion due to mismanagement and high-risk positions.

With more details of witness interviews and court documents exposed, it is surprising that FTX is not only not a good company, but a very bad one. We can at least be certain of two things: there is a lot of evidence showing that FTX has extracted $10 billion from its customers' deposits to make up for Alameda's bad trades, and they have hardly made any effort to track this money.  

Trading losses are one thing, but completely disrespecting customer funds is another. It now appears that when FTX suspended withdrawals during the "bank run" on November 8th, part of the reason may have been that the company didn't even know where the money was. 

Three days later, FTX filed for bankruptcy and SBF "resigned" as CEO. John J. Ray III became the new CEO, and his career involved overseeing the bankruptcy and dissolution of the company. Ray testified in court with legendary language:

In my career, I have never seen such a large-scale company with such unreliable financial information. From compromised system integrity and incorrect regulation, to control being concentrated in the hands of a few inexperienced, unseasoned, and potentially compromised individuals, this situation is unprecedented.

He was also one of the people who supervised the dissolution of Enron back then.

However, SBF received a lot of unwise public interviews and tweets in a top-level apartment worth millions of dollars in the Bahamas, which did nothing but anger onlookers and add to the prosecutor's list of evidence.

On December 13th, SBF was officially arrested by the Bahamian police.

According to the official statement from the Bahamas, the US Department of Justice has formally filed criminal charges against SBF. After receiving formal notification from the US, the Bahamian police arrested SBF and will extradite him as requested. According to sources cited by The New York Times, SBF has been charged with wire fraud, conspiracy to commit wire fraud, securities fraud, conspiracy to commit securities fraud, and money laundering.

Regardless of whether you are an unhappy investor or a developer who has suffered great losses, may you end the difficult year of 2022 and embark on a new journey in 2023!

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