Liquidity problems occur when protocol owners do not plan for unfavorable periods, says Brian Pasfield, CTO of Fringe Finance.
The current market conditions are far from perfect for many crypto industry players, and lending platforms are no exception. For the past few months, many have been facing liquidity issues, which has put pressure on their users and the wider crypto space.
Let’s analyze how we approach these problems – and try to offer some solutions.
Liquidity problem: Market volatility is increasing
Celsius made every conceivable business news outlet when it halted all withdrawals last month due to liquidity issues. After announcing that it would lay off a quarter of its employees due to “extreme market conditions”, Celsius filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.
Similarly, two weeks ago (an eternity in crypto land), the Voyager digital crypto platform announced the suspension of cryptocurrency trading and withdrawals for its users. As noted by company representatives, the reason for this is the outstanding payment of a loan from the Three Arrows Capital (3AC) crypto hedge fund. Voyager Digital is also now going through bankruptcy proceedings.
A third example of how the recent market downturn is taking its toll is Wold, a Singapore cryptocurrency exchange and lending platform. Wald recently suspended its operations, citing financial difficulties amid volatile market conditions. The collapse of Terra, Celsius Network’s financial troubles, and Three Arrows Capital’s default on its loans were the main reasons cited for this suspension.
Interestingly, it seems that the liquidity issues surrounding the crypto ecosystem can be traced back to a precise time.
Does it seem simple to point Terra to ripple effects in the crypto markets? It’s not. While a single event may not be at fault for everything that happens in crypto, it does demonstrate the worrying fragility of our environment.
And once a domino piece falls, others follow, revealing who chose to rely on “too big to fail” assumptions.
Efforts to restore liquidity
Crypto projects generally use two methods to restore liquidity. Larger loans can help restore confidence in the solvency of repayment platforms and enable withdrawals once again. An example of a loan repayment is the recent C$120 million payment to multi-party vault dai number 25977. This avoids vault liquidation costs and reduces the possibility of forced liquidation of funds.
On a different note, the DAO and DeFi projects are looking for ways to liquidate their Treasury tokens without having to sell them. New-Wave DeFi lending platforms are offering the solution. For one, Fringe Finance has officially partnered with Lido Finance, another crypto-lending organization that aims to solve the problems associated with the initial stake of ETH 2.0. Problems include liquidity, immovability and accessibility. It aims to make whitelisted altcoins more liquid and usable in the growing DeFi ecosystem.
Liquidity Problems: The Root Cause
Crypto lending firms were at the forefront of the 2020-2021 crypto rally. Today, however, they are grappling with a number of important issues with regards to tokennomics, algorithms, and liquidity.
These problems come from the fact that we now have access to more complex financial instruments than ever before. Also, these are unapproved and unregulated. The developers had an ambition to build a platform that would bring as much financial benefit as possible.
The key problem is that most platforms are designed with the notion of sustainable development in mind. As soon as growth stops, the bubble will burst. The more massive the platform, the more destruction the explosion can cause to the wider crypto ecosystem, creating the domino effect.
As this effect spreads and bleeds into the market, liquidity is saved as people withdraw from crypto-assets or move to HODLing strategies. Finally, if builders do not account for more unfavorable period conditions when designing their protocols, another crisis could very well be their end.
About the Author
Brian is Passfield’s CTO Fringe Finance, He has over 10 years of expertise in Blockchain, Cryptocurrency, FinTech and DeFi. He has delivered technically complex projects that leverage his engineering background and deep understanding of industry trends and philosophies. Brian has also worked with industry blockchain bodies to advocate for changes in legislation and government policy.
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