Top Crypto fails of 2022

2022 was a rocky year for crypto with major shifts in the regulatory landscape as well as some high-profile falls from grace.

Let’s take a look at the top crypto fails of 2022 and see how far the industry has come since then!

TERRA LUNA

The Terra Luna scandal had far-reaching effects throughout crypto, leading to multiple other entities shuttering their doors.

Terra was a blockchain platform created by founder Do Kwan in 2018. Its native token, LUNA, was created to handle gas fees and transactions, and to stabilize the platform’s algorithmic stablecoin, UST.

UST was pegged to the value of the US dollar, and kept stable by adjusting the supply of LUNA automatically (minting more LUNA if UST went over $1).

In May 2022, $2 billion worth of UST was unstaked from a staking protocol called Anchor, and hundreds of millions of dollars worth of the asset was sold off immediately, possibly as a deliberate attack on the Terra project aimed at destabilizing UST. The selloff happened during an ongoing market crash.

The price dropped to $0.91, causing many people to buy discounted UST which can always be sold for $1 worth of LUNA. However, the price of LUNA was crashing due to the market downturn, and the market capitalization of LUNA dropped below that of UST, meaning there weren’t enough funds to back up UST.

The entire Terra ecosystem collapsed, along with multiple other related financial institutions throughout crypto, and founder Do Kwon fled to an unknown overseas location in the face of criminal accusations.

Collapse of FTX

The failure of FTX rocked the industry as well as the wider financial market as one of the biggest incidences of fraud since the Bernie Madoff ponzi scheme.

FTX was a major crypto exchange valued at $32 billion at the time of the collapse. It emerged in November of 2022 that research Alameda Research, run by FTX CEO Sam Bankman-Fried, held a $5 billion position in the exchange’s native FTT token, and that the Alameda investment foundation was also invested in FTT.

This meant companies under Bankman-Fried were massively overleveraged, and a significant part of the FTX valuation essentially came from a handful of centralized entities buoying up the price.

Binance walked away from FTX negotiations after conducting due diligence, leading to further investigations into the goings-on at the company and ultimately the collapse of the exchange, arrest of the CEO, and shattering of the crypto market’s $1 trillion valuation.

Three Arrows Capital Collapse

Three Arrows Capital (3AC) was a $560 million hedge fund which was severely impacted by the implosion of the Terra Luna project. 3AC also made investments in troubled projects like Axie Infinity, which lost $625 million in a hacking incident, and BlockFi.

This essentially led to a run on 3AC investors looking for their money back, with the firm lacking the liquidity to meet the margin calls. The company apparently also promised 20% annual returns to investors, and failed to deliver.

All of the above led to the collapse of the firm, and founders defaulted on their payments and did not show up to court appearances when sued in a class action lawsuit. Subpoenas have been issued for the founders, who appear to be on the run.

The Importance of Safety in Crypto

These are just a handful of the many scandals and collapses that took place in 2022 in crypto. As you can see, a company’s reputation is paramount, and one should always do their due diligence on a project before investing.

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