2022 Killed Wide-Eyed Crypto Idealism. Here Are Lessons for 2023

7 minute read

What a difference a year makes. Twelve months ago, I published a 2021 appraisal of crypto that focused on NFT art, with the blockchain artist and pioneer Rhea Myers contending that “creativity on every level is the highest I’ve ever seen.” Bitcoin and Ether were worth more than three times what they are now. Sam Bankman-Fried had recently been anointed the “world’s richest 29-year-old” by Forbes.

Since then, crypto has embarked on a long and brutal fall in terms of market value and public perception. Following the collapse of Bankman-Fried’s crypto exchange FTX, many people now consider the technology nearly synonymous with scams. The saga has threatened the mettle of even the most devoted members of the space. NFT trading volume is a fifth of what it was at the end of last December, and about $2 trillion—that’s with a “T”— has been lost from the crypto market since peaking near $3 trillion.

But it’s far too early to write crypto’s epitaph: the industry has recovered from several major slumps in the past. As the calendar turns, it’s likely that a sluggish bear market will stretch on for months. But there are many people in the space working on tools for improving transparency to prevent future collapses; on regulation that both protects consumers and allows them access to crypto across the world; and on financial projects that don’t overpromise rewards.

The hyper-financialization and extreme emphasis on “number go up” (crypto parlance for unstoppable financial growth) only hurt the space in 2022. Next year, it’s time to try a different approach.

Here are some of the biggest lessons that the crypto world (hopefully) learned in 2022, to take into the new year.

If a deal looks too good to be true, it probably is

Get-rich-quick schemes thrived in crypto in the beginning of the year. In particular, many companies offered financial products with interest rates significantly higher than you’d get at a traditional bank. Celsius, a major lender, offered yields of up to 18%. Anchor, a program that was part of the Terra-Luna ecosystem, offered 20%. While these deals were met with skepticism, their creators —Celsius’s Alex Mashinsky and Terra-Luna’s Do Kwon—bragged that they had unlocked mechanisms that were simply better and smarter than their predecessors.

Perhaps unsurprisingly, these schemes quickly fell apart when the market turned downward. Celsius filed for bankruptcy in July with more than 100,000 creditors—many of them individual customers. The Terra-Luna ecosystem became basically worthless, and Do Kwon is wanted by the South Korean police.

Although many people had questioned the sustainability of both Celsius and Anchor during their rises, those criticisms were often dismissed as “FUD:” a shorthand for the needless “fear, uncertainty, doubt” of crypto skeptics. Too often, legitimate criticisms are dismissed as “FUD” by crypto optimists, who would rather believe that their riches will always swell even when faced by strong evidence going the other way.

Decentralization can be a liability

Decentralization is a core tenet of crypto: the idea that no government, bank, or individual actor should be able to control or manipulate it. Crypto leadership should be dispersed, Ethereum founder Vitalik Buterin explained to me in February. “Leadership positions aren’t fixed, so if leaders stop performing, the world forgets about them,” he said. “And the converse is that it’s very easy for new leaders to rise up.”

Read More: Vitalik Buterin is Worried About Crypto’s Future

But in 2022, crypto became shockingly centralized, precisely because there were no gatekeepers or regulators to stop new leaders from accumulating wealth and power. Three leaders in particular—Do Kwon, Su Zhu of Three Arrows Capital, and Bankman-Fried—amassed fortunes through social media charisma, sketchy financial products and a fierce growth mindset. They each earned widespread trust early in the year, and their projects became so integral to the crypto ecosystem that they seemed too big to fail. Yet fail they did.

When Kwon’s Terra-Luna ecosystem fell apart, a vicious contagion hit crypto markets, in turn felling Su Zhu’s Three Arrows Capital and then Bankman-Fried’s FTX. Crypto was supposed to be about code, not people—but three men were able to accrue enough power to wipe out trillions in value.

A similar problem plagued DAOs (decentralized autonomous organizations), an organizational structure that was supposed to be more equitable for members. But because voting in those organizations was often based on the number of tokens you owned, a July study found that across several major DAOs, less than 1% of all holders retained 90% of the voting power.

Self-regulation is failing to stop scams

Crypto’s number one enemy in America this year was Securities and Exchange Commission (SEC) Chair Gary Gensler, who used his power to crack down upon various crypto projects. Many crypto insiders believed that the industry should exist outside the purview of the SEC, and that the blockchain would allow them to self-regulate effectively.

But crypto communities also failed to sniff out bad actors in their midst before it was far too late. First, investors of the decentralized finance (DeFi) project Wonderland failed to notice for months that its co-founder was Michael Patryn, a long-time scammer who had led a Canadian crypto exchange that had defrauded customers $190 million.

Sam Bankman-Fried also amassed unprecedented power and popularity without anyone in crypto (or outside of it) bothering to fact-check whether anything he said was true. While it is true that Bankman-Fried’s downfall was brought about by insiders—including the crypto news outlet Coindesk and then Bankman-Fried’s rival Binance Changpeng Zhao—these revelations came too late for at least one million FTX customers and investors.

It’s getting easier to catch crypto criminals

Billions of dollars worth of crypto were swiped in scams this year, according to blockchain analysis firms like Chainalsysis. But while thieves thrived on the blockchain by exploiting bridges between chains and persuading users to hand over their personal keys, it also became increasingly clear that its transparent nature helped police track them down. The Department of Justice and other law enforcement agencies have become increasingly active and adept in tracking down stolen money by tracing information trails across the blockchain. In February, the DOJ tracked down $3.6 billion in Bitcoin that had been stolen in 2016.

Last month, the journalist Andy Greenberg published the book Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency, which reveals the increasingly sophisticated techniques that investigators use to track down crypto criminals. “It took me a decade to realize how opposite of untraceable Bitcoin really was,” Greenberg told me in an interview. “Cryptocurrency tracing was not only possible, but an incredibly powerful investigative technique. And in the hands of one small group of detectives, it led to the bust of one massive cyber criminal operation after another, each bigger than the last.”

Crypto prices are increasingly tied to mainstream markets

Crypto idealists want to believe that Bitcoin and Ethereum operate outside of the traditional financial systems, and that cryptocurrencies are inflation-resistant. This was proved false in 2022: the prices of these currencies have begun to move in tandem with larger markets like the S&P 500.

Crypto has certainly provided a lifeline for investors in countries with radically unstable currencies, like Venezuela. Crypto has also proved crucial for expedited fundraising and money transfers in Ukraine during the Russian invasion. But just as the stock market has tanked, with tech stocks in particular faring poorly, so too has crypto.

Read More: Here’s Why Bitcoin and Other Cryptocurrencies Keep Crashing

Ethereum’s merge was a rare bright spot

Amidst the slew of bad news, there was a shining bright spot for the crypto community: Ethereum completed its transition from Proof of Work to Proof of Stake after years of preparation. The transition reduced Ethereum’s energy usage by over 99.9%, according to estimates, and was shepherded into existence by a team of developers working in tandem across the world. The merge sets the stage for Ethereum to become faster, cheaper and more secure.

Read More: Why The Ethereum Merge Matters

More Must-Reads from TIME

Contact us at letters@time.com