My take on the crypto winter

Roberto Capodieci
5 min readJul 22, 2022

2022 seems to be the 2008 crisis of crypto, a crypto financial recession.

Centralized crypto service providers, such as crypto lenders, exchanges, and hedge funds, as well as many DeFi projects, are going legs up, one by one.

For the Centralized crypto service providers we hear recently of Voyager Digital, Celsius, Vauld, Zipmex, CoinFLEX, SkyBridge… Just google for “pauses withdrawals” under “news” and you get the list!

The events are similar one to the other: they begin stopping withdrawals and trading, reassuring it is temporary, until most of them go into bankruptcy, leaving all their clients at a loss.

They promote themselves using influencers, and do the classic business of getting deposits offering an interest, supposedly lend those deposits out for a higher interest, and make the money in the difference in the interest rates, or invest in the market and use the income to pay the interest.

One of the problems is that they all are depending too much on each other.

Voyager Digital at least seemed to do what they were meant to do, yet 50% of their loans went to a single hedge fund (three arrows capital). The edge fun used the loaned crypto to invest in Luna (more on this later) as Luna collapsed the loan went bad, so they became insolvent, taking Voyager down with them.

Celsius (same lawyer of Voyager) has been called a ponzi scheme in a court filing by their “Head of DeFi staking” Jason Stone, also CEO of KeyFi.

Another story are the DeFi projects, supposedly decentralized (but are they?) Whatever doesn’t have a creation of value (people pay for a service) end up ending with losses. It is difficult to architect a decentralized DeFi system that is sustainable and covers its costs, generating revenue. This is why most of the promoted ones look to me more like Ponzi schemes, than real sustainable DAOs.

Ponzi schemes used to be illegal, but dressed up as Stable Coins, DeFI or Play to Earn, are now everywhere. Let’s talk about stable coins. What is a stablecoin?

They are cryptocurrencies that represent fiat currencies and are used by people that want to secure their crypto investments in high volatility, without having to exit the crypt world (by exchanging crypto to fiat and vice versa). Usually stable coins are backed by securities or deposits…. Which means that for each say 1 USD represented by a crypto token, there is a 1 USD deposited in a bank, or the holding of stocks, for example, with a value of 150% the backed crypto, to guarantee the deposit in case of value shift of the security. To guarantee the value of the stablecoin, all that is needed is an audit of the deposits, to see if they match the crypto token in circulation. And the trust on who does the audit.

Other stablecoins, instead, use (an)other crypto(s) for the baking, and balance all using an algorithm. They are called “algorithmic stablecoins”, which means that they rely on arbitrage to keep their value at 1 dollar.

How do they work?

Say they have two coins: one supposedly stable, another to absorb the volatility. The algorithm automatically converts stable to volatile and back based on need, and users are incentivized to do the same. Yet the algorithm assumes the stable coin is actually stable, but when people dump it to move to other stable coins… then disaster hits! How? People keep selling the stable coin, so the algorithm keeps creating new volatile tokens, causing a loop… called debt spiral.

The key point is that people use stable coins as a bank account, where they store their savings, while earning an interest that a bank will never offer. Funny enough people move to stable coins to be safe from the volatility and the risks of the crypto world.

Two cases:

Terraform Labs co-founder Do Kwon has been nominated in the Forbes 30 under 30. TerraUSD (UST), presented as a low risk investment where, instead of the market deciding interest fees, he promised a fix earning of 20% per year on deposits, using a so-called “algorithmic stablecoin”.

As explained earlier, it lost its peg against the US dollar and sent its sistercoin Luna crashing to zero, erasing about $45bn. The crash wiped out the savings of all its investors overnight. Anxious investors rushed to dump their TerraUSD holdings and the token cratered, bringing Luna down with it, causing another 15bn dollar in losses considering the value at its peak.

Some people saw it coming, and some made money. Pantera Capital, a hedge fund, saw a 100x return on its investment. They held and traded Luna, but sold about 87% of their position between Jan 2021 and Apr 2022, right before the crash. For all the others, each 1M dollar invested before the crash is now worth 3 dollars!

What happens normally to someone causing 60bn in losses to investors? In 2009 Bernie Madoff lost investors’ 60bn. Got sentenced to 150 years of prison. Do Kwon, the guy behind Luna, after he lost 60bn of investors money… Well, he made Luna 2.0. (Which, no surprise, ended up crashing again).

One would think consumers would have learned from past events, but Justin Sun (the creator of Tron) now created USDD, and launched it just a few days before Luna collapsed, promising a fix earning of 40% per year on deposits. Twice as much as UST.

It is not an algorithmic stablecoin tho. The difference from UST is that the creation of new tokens to represent US dollars for now is given limitedly to a few institutions. This avoids the risk of the algorithm causing the disaster caused with Luna. The stability and security of USDD are ensured by the over-collateralization of multiple mainstream cryptocurrencies, covering 324% of the backed value.

But is it safe?

Well, let’s not forget that they offer 40% of return on investment, per year! The over collateralization is good until the coin is not super successful, as more USDD are minted, less it is over-collateralized, until it is under collateralized, and it enters in a debt spiral as Luna did.


It is important that a service is really decentralized, tested in time, and decisions can be voted on by the community supporting the project. A “fake” decentralization of a DAO can be one more time seen on another project of Justin Sun: the “JustLand” DAO. Proposals pass if they receive more than 600 millions supporting votes. Justin Sun’s wallet has 600 million and one vote. Oh, Justin Sun also minted 94% of all the USDD in circulation. As of today (22nd July 2022) the circulating supply is 725,332,043.61 USDD of which 683,320,461 USDD minted by Justin Sun. The speculation is that by burning Tron Coins to create USDD, and then converting USDD into USDC, for example, he can cash out from his Tron holdings without crashing Tron price! Because treating cryptocurrencies as a speculative vehicle, requires means to cash out.