Hacks, Collapses, and Major Updates – The Biggest Crypto Stories Of 2022

It has been an exciting and challenging time in crypto media covering what has been the most consequential year many sector participants have ever seen. For our year in review, we look back at the biggest stories that shaped crypto in 2022.

Story Of The Year – The FTX Bankruptcy And Scandal

FTX, one of the largest exchanges in the world, went under in 2022. The failure of FTX began with the collapse in the value of FTT, the native token of the platform, and stemmed from the illiquidity of connected trading and investment firm Alameda Research.

FTX was one of the largest and most used exchanges in the world and had a reported 5 million global users. It was a major player in both crypto spot and derivatives. Its venture capital arm FTX ventures was one of the biggest startup backers in the space and was incubating some of the most exciting DeFi, cross-chain bridging, and Game-Fi projects in crypto.

It was also one of the most visible and institutional-friendly projects in crypto. Its backers included Blackrock, Softbank, and the Ontario pension funds, investors that rarely ventured into crypto investments. It bought the naming rights for one of the largest sports and entertainment venues in Miami, it was endorsed by sporting superstars Tom Brady and Steph Curry and had a Super Bowl ad featuring legendary comedian Larry David.

The fall of FTX is a story that continues to twist and turn with new revelations (sex, deceit, and drug-use) being revealed every day. Former FTX CEO Sam Bankman-Fried (SBF) continues to make public appearances and seemed to be on a bizarre apology tour against the advice of his lawyers.

It is perhaps the biggest crypto story of 2022 not because of the size of the collapse but due to the scandal and the financial damage caused. Founder Sam Bankman-Fried has now been arrested (about time, many would say) in the Bahamas and is waiting to be extradited to the US.

The Collapse of Terra – The Empire has No Clothes

In May of this year, the digital asset market was left reeling after one of the largest sequential deleveraging events ever. What began with the collapse of the Terra blockchain and the devaluation of the LUNA token and the UST stablecoin, led to the implosion of the Celsius credit platform and investment firm Three Arrows Capital (3AC).

It is also clear that the market chaos caused by the fall of Terra was a factor in the collapse of Alameda Research and FTX later in the year. The Terra ecosystem was built on an algorithmic model where a native stablecoin UST was backed (minted and burnt) by a Proof-of-Stake asset LUNA.

This was a leverage-driven model. When a run on Terra began and contagion set in, the fall of the house of cards was quick because of the leverage. The UST stablecoin and the Terra ecosystem were also insured by large amounts of other assets including BTC and AVAX. The ferocity of the sell-off was severe and the exposure to Terra, Luna, and parallel platforms like Anchor across the industry was high. When the walls came crashing down every stakeholder in the space was left shell-shocked and affected in some way.

The Ronin hack – The Biggest Crypto Exploit Ever

2022 has been the biggest year for ‘hacks’ (as assessed by Chainalysis) primarily because of the growth in Defi exploits which have dominated the crypto hacking landscape. Over US$700 million worth of assets have been stolen from crypto users this year at an average pace of over 10 significant hacks a month.

The exploits of the Wormhole and Ronin Bridges, worth US$320 million and US$650 million respectively, were major factors for why Q1 2022 was such a big three months for Defi exploits. With tools like the Wormhole bridge, users can natively port digital assets between Ethereum, Solana, and Terra networks with a single unified interface.

A major issue with bridges between blockchains, however, is smart contract vulnerability. Bridging between blockchains is a complex operation with many moving parts. There are more points of failure and well-resourced hackers can often move faster than developers. The massive Axie Infinity/Ronin Bridge hack spawned US sanctions against Ether (ETH) addresses alleged to belong to the North Korean hacker group Lazarus. Indications that government-funded hacking groups are targeting DeFi projects are worrying.

Both the susceptibility of new DeFi features to be exploited, and the growing technical capacity of hackers have been key factors for the growth in hacks in 2022. Groups like North Korea based Lazarus are professional organizations with governmental resources and are able to target bigger fish than individual hackers in the past have been able to.

Ethereum Undergoes Its Largest Update Ever – The Merge Is Here

The Merge upgrade which officially kicked off in early September was described by the Ethereum foundation as ‘the most significant upgrade in the history of Ethereum.’ The Merge witnessed the joining together or ‘merging’ of the execution layer, Ethereum as we know it today, with a consensus layer called the Beacon chain.

The Beacon chain uses a Proof-of-Stake (PoS) consensus model that will replace the current Proof-of-Work (PoW) model that the mainnet currently uses. The switch to PoS will replace energy-intensive mining, and instead secure the network with staked ETH.

Summary

As we end the year, the industry is reeling and there are no signs of a thaw to the crypto winter. The good news is that the worst excesses of leverage have likely been flushed from the system, and the bad actors behind FTX have been exposed. A period of introspection and reflection is required. However, from the ashes, crypto will rise again. See you in 2023.