2022 was a tumultuous year for the cryptocurrency industry. Many investors who entered the market during last year’s bull run were discouraged by losses suffered in 2022, leading some to leave the space altogether. The market saw a US$2 trillion rout, and major players such as Terra, Three Arrows Capital, and FTX collapsed.
However, 2022 also brought some positive developments for the industry. Ethereum saw progress with the release of “The Merge”, and governments around the world began to recognize the potential of cryptocurrencies amid economic uncertainty and high inflation.
Despite challenges faced in 2022, it is clear that the cryptocurrency ecosystem has a strong foundation and will continue to thrive in the coming years. Let us reflect on the most significant events of the year, and the progress made in the mainstream adoption and recognition of cryptocurrencies.
In this two-part series, we will walk you through our top 10 crypto highlights of 2022.
1. Ukraine Accepts Donations in Crypto
The conflict between Russia and Ukraine had significant repercussions on global markets, including the crypto industry. When President Vladimir Putin ordered a military invasion of Ukraine, the market dropped. However, the war also brought cryptocurrencies to the forefront.
Within a few days of the invasion, the Ukrainian government’s official Twitter account sent a tweet requesting donations in Bitcoin and Ethereum, with two wallet addresses provided. This led to confusion, with Vitalik Buterin warning that the account may have been hacked. However, the government’s Ministry of Digital Transformation quickly confirmed that the request was legitimate and that the government was seeking cryptocurrency donations to fund its war relief efforts.
The campaign was successful, with over $50 million worth of BTC, ETH, DOT, and other digital assets, including a CryptoPunk NFT raised. The Ukrainian government’s embrace of cryptocurrencies during the crisis extended beyond the initial fundraising campaign, with the creation of an NFT museum and the involvement of UkraineDAO in raising additional funds and awareness.
The role of cryptocurrency in the Russia-Ukraine conflict demonstrated the power of borderless money in times of crisis, as it served as a valuable tool for those in need. The Ukrainian government’s request for crypto donations was a historic first, and other countries will likely adopt cryptocurrency use in the future.
2. The Ronin Bridge Attack
Hacks and scams have long been a problem in the cryptosphere. In 2022, one of the most significant incidents was the attack targeting Axie Infinity’s Ronin bridge, which resulted in a loss of around $600 million. According to investigators, the attack was carried out by the North Korean Lazarus Group, which managed to exploit weaknesses in the Ronin chain’s validation system to gain access to five of the nine validators.
To one’s surprise, the Ronin Network team was not aware of the attack until six days after it had occurred, which only worsened the situation. The Ronin attack marked the beginning of a series of attacks by the Lazarus Group in the crypto space. In June, the group used a similar phishing scheme to steal $100 million from the Harmony Layer 1 network, and also targeted DeFiance Capital founder Arthur Cheong, resulting in the loss of valuable NFTs worth about $1.7 million.
3. The Rise and Fall of Terra
Terra, once a major player in the cryptocurrency market, experienced a significant rise in popularity in late 2021 and early 2022 due to the success of its stablecoin, UST. Unlike many other stablecoins, UST was not fully collateralized and instead used an algorithmic system to maintain its value relative to the US dollar. This system allowed users to create new UST tokens by burning an equivalent amount of Terra’s LUNA or to exchange UST for LUNA. The success of UST was further boosted by the Anchor Protocol, a lending platform on Terra that offered a 20% yield on UST loans.
At its peak, the Terra ecosystem was valued at over $40 billion, but the dual token system ultimately led to its downfall. On May 7, a series of large selloffs caused UST to lose its peg, and it experienced another drop two days later, resulting in a panic as UST holders rushed to redeem their tokens for LUNA. This influx of supply caused the value of LUNA to plummet, leading to even more redemptions. By May 12, UST was trading at $0.36 and LUNA’s price had fallen to a fraction of a cent.
The collapse of Terra not only resulted in significant losses for investors, but also caused a liquidity crisis for other major players in the market, including Celsius, Three Arrows Capital, Genesis Trading, and Alameda Research. The incident led to increased scrutiny of stablecoins, particularly those that use algorithmic systems, and highlighted the risks of decentralized finance.
4. The June Liquidity Crunch
The collapse of the Terra ecosystem in May had far-reaching consequences, as it wiped out billions of dollars in value and attracted the attention of prosecutors across multiple countries. By mid-June, the effects of the Terra fallout had started to appear in centralized retail crypto markets, leading to even more turmoil.
Celsius, a crypto lending company, alerted its customers on June 12 that it was indefinitely suspending withdrawals. This was a clear sign of trouble, as it was later revealed that the company had invested in Terra and that CEO Alex Mashinsky had engaged in unauthorized trading on the company’s books. As its investments became insolvent, it sparked a chain reaction among several other firms, including Maker, Compound, Aave, Genesis, and Three Arrows Capital.
Three Arrows, in particular, was severely impacted, with rumors of its insolvency circulating and its co-founders, Su Zhu and Kyle Davies, going silent. It is believed that they owe around $3.5 billion after defaulting on a series of loans. Other companies, such as Voyager and BlockFi, were also affected by the contagion that eventually reached Sam Bankman-Fried’s FTX empire.
5. The Launch of Proof-of-Stake Ethereum
Ethereum brought some good news to the crypto space in the summer of 2022, as the long-anticipated “The Merge” upgrade finally shipped.
The hype around The Merge helped lift the market out of despair following the June liquidity crisis, and speculation about a Proof-of-Work fork of the network further fueled interest. As a result, ETH saw a 100% increase from its June low, leading to hopes that The Merge’s benefits, including 99.95% improved energy efficiency and a 90% reduction in ETH emissions, could help turn the market bullish.
The upgrade was successfully implemented on September 15, though some traders had predicted that it would be a “sell-the-news” event, which did occur. Despite the weak price action, the Ethereum community celebrated The Merge as crypto’s biggest technological update since Bitcoin’s launch, and Ethereum developers were widely praised for its success.
The Merge has significantly changed Ethereum’s monetary policy, which is believed to make ETH deflationary in the long term, having set the stage for institutions to adopt ETH for yield. As such, if the crypto market enters a new bull phase in a post-Merge world, Ethereum could have a strong chance of leading the charge.
The second article in this two-part series will look at regulations, adoption, and the fall of FTX.
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