Opinion: The coming Castle Bravo event for crypto

March 22, 2022

By Karthik Iyer

I have been in the crypto space since the early days and I am what people call an OG. I took a taxi to speak at a conference recently where the driver had a bitcoin sticker and I asked him if he was a trader and he told me he was new and did not know much but was keen to invest all his lifesaving’s in a crypto MLM project as his friend had mentioned he can retire in one year. He mentioned he was the sole breadwinner and had to support a family of 5 back in his home country (a poor developing nation), I felt not very good knowing what I knew about this space I told him not to take unnecessary risks with his hard-earned money and to be careful. I got out of the taxi spoke at the event and went to sleep that nite with the words of the driver constantly in my mind. After 2 days of not being able to brush off this thought, I felt obligated to write this as a way to protect and educate half a billion poor and middle-class people who are about to get into this industry with high hopes and dreams.

I have seen the industry from its infancy 12 years ago when the entire market cap was under 100 million to what it is today 1.82 trillion. The value of experience is that it takes time for data to become information, for information to become knowledge and for knowledge to become wisdom. As there is no way to compress this cycle , experience trumps skills.

In my over a decade of experience, I have seen 4 crashes, the first mtgox hack in 2011 that brought the infant crypto markets down, the 2013 FBI taken down of Silkroad, the 2016 DAO hack and the 2018 bursting of the ICO bubble. We are at the cusp of what could potentially become a multi-trillion-dollar crash which will bring in a lot of pain and suffering all over the world and wake up regulators and security institutions globally. This is an extension to what I wrote in 2014.

Here is how I see it today:

Defi Security issues & Counterparty risks

Today we have over 300 billion worth of assets locked in defi contracts which is predicted to reach a trillion next year. Lot of the defi contracts are getting hacked regularly where users lose money , about 2.3 billion has been lost in hacks of 83 defi contracts . There is no comprehensive security model or audit framework which can be used to understand and value this risk today.

Lot of the lending platforms lend out crypto assets to third parties , there are huge risks associated with this which are not fully disclosed or captured in existing risk models, so the fall out from the counterparty risk could sometimes bring down entire defi platforms if not managed properly.

Metaverse dream merchants

There are over a 100 metaverses today, everybody and his mother is aiming to sell land in these metaverses claiming that they will go up in price as one celebrity or the other will live in their metaverses. Except for a few metaverses such as decentraland and Sandbox where most folks today hangout there are hardly any foot falls in others. Most of them dont seem too keen to build ecosystems or do not seem to know how to do it.

NFT rug pulls (FOMO Ninjas)

There are today over 10 million collectibles in the NFT space and they are sold through FOMO (fear of missing out) usually young youtube influencers pump these NFTs and after a few months they lose their value.

Most of these NFT’s are ill-liquid and are hardly sold once or twice in their lifetimes. With billions wiped out already in the NFT space bigger crashes are inevitable.

Auditability of stable coins

While there are some legit stable coins that follow the audit procedures of the jurisdictions they are based in, a good portion of them do not publish the backing of assets publicly and it is purely based on faith that investors are investing in some of these coins. When a claimant files a lawsuite in the future asking for the company to disclose assets and if it is not found most of these stable coins might lose their peg as it will ripple out into the wider markets.

Discrepancy between price and Value of L1’s

When a user buys a token of a Layer 1 protocol they use it to pay for the execution of a transaction in the network (network fees or gas fees) which represents the price of the compute power at the given time say T0 but the tokens are also traded like a security in an exchange where the user is paying for the future value of the network Say T1 (future cashflows / gasfees flows), so most of these networks have a huge mismatch between actual price T0 and value T1 or lack a meaningful model to price this.

I gave a tokenomics master class right after the 2017 ICO crash to help startups price their tokens meaningfully (see here).

This is compounded with lack of oversight and regulations; there have been various exchanges that have been caught doing wash trades and pump and dump schemes or founders running away with the tokens.

Ponzi schemes and MLM in Gaming tokens

While I have seen a huge amount of MLM scams in the 2017 ICO boom, 2022 takes it to a different level, meme tokens and game tokens employ MLM models to recruit token holders and we know what usually happens to the bottom of the pyramid, the last fool is left with holding all the s**tcoins which often goto zero.

Castle Bravo was the largest nuclear detonation by the United States which caporized the island of Bikini Atoll, a potential upcoming crash will be massive wiping out a lot of bad players but also some good players along with it. Blockchain’s were created to solve some of the existing issues with the financial system after the subprime crisis but have meta-morphed into something that is worse than what we saw in 2008, With almost no oversight or regulation and an average investor bombarded by FOMO a huge crash is inevitable; this might start in the DEFI or NFT space and spiral out into other areas of the crypto industry potentially later this year wiping out over a trillion dollars. As responsible Blockchainers it is key to educate the small investor and keep off bad actors. We have to protect the little guys if not we are no better than the system we are trying to replace and make better!

The future of decentralization is bright but in the short term a lot of pain and cleansing might be coming, hopefully lessons will be learnt from the mother of all crashes.

About the author

A Bitcoin pioneer, Karthik Iyer is the ambassador of the P2P Foundation and the chief executive of blockchain consulting firm BlockchainMonk.

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