It was inevitable.

We all knew that this was a matter of time.

The consequences?

In the short term, unpredictable but potentially cascading into more bankruptcies.

In the long term, potentially disastrous for a specific industry in Crypto, to the point of destruction.

What started as a “temporary” freezing of withdrawals, has turned today into yet another multi-billion Crypto company collapse.

Another multi-billion loss.

For who?

Yeah, you know who, the same who always pay the price… it’s you and I, my friend.

BlockFi and the 100,000 in despair

For weeks, BlockFi “resisted”.

But, in the end, the demise was inevitable, as today, officially, BlockFi, the Bitcoin-main Crypto centralized lender, has filed for Chapter 11 bankruptcy.

Now, with a painfully-long process of restructuring ahead, the funds of all creditors are stuck in a dead, rotten company.

Once again, those in more need of cash suddenly see all their money vanish, to only hope for a pitty return of, what? 20 cents on the dollar?

Will they actually receive anything?

Too early to tell.

Thus, what on earth went wrong?

BlockFi and its deadly relationship with FTX

As it turns out, BlockFi was already on the brink of collapse months ago, after the summer crash.

Needless to say, BlockFi had already paid $100 million in fines to the SEC back in February, and the incredible debacle of Terra/Luna that brought the whole space officially into yet another Crypto winter created some serious liquidity issues on BlockFi.

Luckily — or should we say sadly — the entity that came in to save the day for BlockFi was none other than Sam Bankman-Fried’s now-dead FTX, with a $400 million loan.

Albeit officially being a line of credit, this loan was in all effects FTX buying BlockFi.

But you may be wondering, considering the official numbers (god knows the real ones) BlockFi wasn’t a creditor to FTX but a debtor, so why is now BlockFi collapsing after the demise of FTX?

Something’s off, right?

Well, as it turns out, everything was wrong.

The FTT collapse was the end for BlockFi

As everything related to FTX, the credit line that FTX gave BlockFi was shady as f*ck.

The reason?

$250 million were loaned with FTT, FTX’s native cryptocurrency.

Thus, we can easily foresee what went wrong with BlockFi the moment FTX collapsed.

FTX collapsed because of a huge bank run due to news releasing that their balances were heavily represented by their native and massively illiquid coin FTT.

The bank run created a massive loss of confidence in FTT, which caused the cryptocurrency to go to zero.

And, with that, the end of BlockFi, as their $250 loan was suddenly worth zero.

I’m actually surprised they took so long to file for bankruptcy.

And, what now?

100,000 creditors and $10 billion

You read that right.

According to BlockFi executives, the company had up to 100,000 creditors and a range between $1 and $10 billion in assets and liabilities.

Jesus Christ.

That’s all I can say right now.

CeFi is dying in front of our own very eyes

To me, as I discussed articles, this is basically another nail in the coffin for CeFi.

Crypto’s centralized finance will probably not survive this Crypto winter.

Why?

Simple, Crypto has proven incapable of working with a fractionalized reserve system (entities loaning customer’s funds to generate profit) because in such a drastically volatile industry where investors are the type of “run for the bank first, ask later” means that any Crypto company without full reserves is basically exposed to bankruptcy in a matter of… hours?

I’ll be even bolder.

I can’t fathom any other scenario besides the one where all CeFi, except centralized exchanges with full, cryptographically-verifiable proof of reserves (that includes both assets AND liabilities, the latter of which none of the current exchanges besides Kraken has successfully proven, not even Binance), dies.

Keyword in “full”, as no centralized crypto exchange should ever again work on a fractionalized reserve system.

Enough is enough.

Or… is it?

Sadly, it seems the pain is far from over, as now the BlockFi collapse will probably huge pain to creditors, many of which we still don’t know, who suddenly have a huge hole in their balance sheets.

Is Genesis next?

While we are still digesting the BlockFi bankruptcy and all the potentially scary outcomes we might endure, we have to inevitably set our minds on another potential slump, Genesis Trading.

And that my friends, is a much, much scarier scenario, as Genesis could bring down an even bigger player, DCG.

For those wondering, Genesis is yet another CeFi player on the brink of disappearance, amid a huge hole in their balances after the collapse of FTX.

The problem?

Genesis is part of DCG, one of the biggest Crypto companies in the world, which happens to also own Grayscale, the largest Bitcoin trust in the world with over 633k Bitcoin.

Yes, six hundred and thirty-three Bitcoin, $10 billion in value in today’s prices.

Although this is somehow complex to explain, DCG could be forced to unwind their closed-end fund, known as a trust… potentially releasing 633 thousand Bitcoin into the market.

If that isn’t the reckoning day for an already-in-life-support Crypto industry, I don’t know what it is.

Let’s just hope it doesn’t get there.

And yet, amid all these hugely negative news, I am still more convinced than ever that Crypto is making it out alive.

Probably losing CeFi in the meantime, but nevertheless alive.

The reason?

Probably — and may I insist, probably — DeFi is the reason.

Note: This is NOT financial advice of course, this is just an opinion and I could be plain wrong and the Crypto industry completely crumble; I have no clue of what will happen (no one does for that matter).

DeFi resists, for now

Besides the impossible contradiction of the majority of DeFi today being managed by centralized entities (and that includes the majority of DAOs, which are in reality far from decentralized), and although this is a talk for another day, DeFi is holding its ground pretty solidly.

Besides some liquidity issues by protocols like Aave, no DeFi protocol has succumbed to the liquidity-crunch wave Crypto is in right now since the debacle of FTX two weeks ago.

At the end of the day, it makes total sense.

DeFi is ruled by smart contracts, code snippets that aren’t greedy as f*ck as humans are, who have proven time and time again that they are reckless and utterly incapable of creating solid companies in an unregulated environment like Crypto.

Actually, humans have still managed to f*ck things up in regulated environments, with blatantly moronic cases like Credit Suisse.

The fact we have figured out a way (smart contracts) to manage financial products is simply too enticing not to be excited about it.

Let humans out of the decision-making!

So… what now?

For now, the consequences of yet another bankruptcy are unforeseeable.

We should reflect, as an industry, on what brought us here, and try to understand what we can do to prevent this from happening again.

In the meaning, we should expect much tighter regulatory control and a few years of… uh, continuing to building and innovating?

We’ve probably been set back for years after all of this.

But I have no idea what’s going to happen.

I could care less about price action, as I’m not a financial advisor or expert. I am a technologist, someone who truly understands the potential that blockchain has.

For people like you and me who believe in blockchain, events like this don’t divert us from the vision of a future where blockchain is absolutely, unquestionably critical in our lives, even if then we don’t realize its presence.

Nobody can claim to know if DeFi will survive.

Nobody can claim to know if 99.99% of blockchain projects will die.

Nobody can claim to know if NFTs will ever be a thing.

But what nobody seems to put into question is that blockchain technology is simply superior in cases where data security and privacy must be protected at all consequences.

Maybe Web3 was clearly an overstatement, and many of the so-called “use cases” were never meant for blockchain. But some, even if they are only a few, are invariably destined for blockchain.

Focus on the technology and you’ll be fine.