2022 started with a free fall in major cryptocurrencies including Bitcoin and Ethereum. At that time, it was seen as just part of the ebb and flow of financial speculations. But it was soon followed by the crash of leading stablecoin TerraUSD.<\/p>\n
Stablecoins are supposedly engineered to protect investors from the high volatility of cryptocurrencies. Yet billions of real dollars vanished while also taking down the Luna cryptocurrency.<\/p>\n
The spillover effect continued with crypto-lending firms such as Celsius and BlockFi collapsing, crypto hedge fund Three Arrow Capital going bust, and crypto broker Voyager buckling.<\/p>\n
If there were a flaw with cryptocurrencies, it is not technological but\u00a0existential.<\/p>\n
Indeed, the tumultuous picture surrounding cryptocurrencies this year has been alarming and sobering. And now, FTX founder\u00a0Sam Bankman-Fried has been arrested<\/a> in the Bahamas on a US request.\u00a0<\/p>\n With entire cryptocurrency players collapsing\u00a0at such breakneck speed, it is difficult to grasp how this chain reaction took place, leaving a pall over the future of cryptocurrencies.\u00a0These events have only amplified the debate between crypto proponents and crypto sceptics. But it is also worth considering whether the ongoing debacle points to a major flaw in cryptocurrencies or in its ballooning ecosystem.<\/p>\n All cryptocurrencies are underpinned by\u00a0blockchain technology<\/a>, which enables the upkeep of decentralised electronic ledger of coin ownership. Blockchain technology has been scientifically studied, thoroughly tested and validated, including in robotic applications beyond the crypto universe. At their core, blockchains facilitate the maintenance of electronic ledgers without the need for a centralised authority and regulators \u2013 the way most national currencies do. This carries implications for international controls, too.<\/p>\n But if there were a flaw with cryptocurrencies, it is not technological but\u00a0existential<\/a>: do cryptocurrencies serve a purpose, a market, or any other function as opposed to prevailing centralised monetary systems? This key question is also fiercely debated by experts and crypto proponents, the former arguing that cryptocurrencies are intrinsically speculative assets. Nevertheless, cryptocurrencies, like gold, can be regarded as just another speculative asset in the financial system.<\/p>\n No detailed map of how all these actors are connected to one another is available.<\/p>\n A case can therefore be made that the serious challenges facing the crypto world lie with its ecosystem and not with the cryptocurrencies themselves. As is apparent from the investigations that followed past crypto-dominoes falling, the crypto ecosystem constitutes a closely-knit constellation of actors \u2013 lenders, hedge funds, exchanges, wallets, stablecoins being the most prominent ones. Most of these institutional actors of decentralised finance (DeFi) play a role akin to that of their traditional finance (TradFi) counterparts, and they operate in a fully centralised fashion.<\/p>\n The heralded feature of decentralisation, which is supposedly meant to afford cryptocurrencies superiority over classical currencies, is simply bypassed (investment bank Morgan Stanley recently reported that centralisation is a natural evolution of the financialisation of cryptocurrency markets). Another important factor is that most of these crypto actors have very limited interactions with TradFi markets. Indeed, a foot into TradFi means abiding by its regulatory framework, while the crypto world knows few and limited regulations.<\/p>\n Effectively, the DeFi ecosystem forms a complex network of interdependencies, primarily among crypto actors themselves with a few bridges at the margins of TradFi. However, in the absence of systematic regulation, no detailed map of how all these actors are connected to one another is available: we do not actually know how the DeFi network looks like.<\/p>\n Nevertheless, Network Science, a subfield of\u00a0Complexity Science<\/a>, can help us\u00a0understand the broad contours of the cryptocurrency ecosystem and the dominant networks within it.\u00a0We can draw on the limited knowledge we can derive from post-mortem analysis of the recent major collapses of TerraUSD and FTX for instance. Those revealed an excessively high level of clustering\u00a0in the crypto ecosystem \u2013 a common property in your own\u00a0social network if your friends are also friends with one another<\/a>.\u00a0<\/p>\n![\"A](\"https:\/\/news.google.com\/sites\/default\/files\/inline-images\/GettyImages-1245585769.jpg\")