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Coinbase Predicts a Longer Crypto Winter – Cross-Chain Liquidity Can Save the Day

Coinbase Predicts a Longer Crypto Winter – Cross-Chain Liquidity Can Save the Day

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2022 was quite a nightmare for the crypto industry. Its market capitalization shrank by almost 60% over the year, going from $2.2 trillion to $797 billion.

The two leading coins by market cap – Bitcoin (BTC) and Ether (ETH) – also went down by 64% and 67%, respectively.

Terra (LUNA) crashed in May. Then the Fed raised interest rates in the US. These factors, among others, rattled the crypto market significantly, putting it into a lull.

And finally, in November, FTX – the third-largest crypto exchange at the time – blew up following severe allegations of misappropriating users’ funds.

FTX’s collapse will have “second-order effects” that might extend the ongoing crypto-winter until the end of 2023, according to a report by Coinbase. Since many institutional investors have their funds stuck in FTX, “poor liquidity conditions” may prevail for some time now.

These claims have substantial merit – but from a single-chain perspective on liquidity. Though several macroeconomic changes are necessary for crypto markets to recover fully, tapping cross-chain liquidity is a crucial means to this end.

Besides offsetting the liquidity crisis caused by the FTX fiasco, it can improve price stability and volume. And with greater ease of access, cross-chain liquidity aggregation can attract retail and institutional investors.

Crypto’s liquidity crisis is bigger than FTX

The collapse of massive players, like FTX, Terra and others, is undoubtedly a significant reason behind the crypto industry’s liquidity crisis.

But to be fair, the problem is bigger and more fundamental than how particular companies conduct their affairs or fail to do so.

To work in the right direction with realistic expectations, stakeholders must call a spade a spade instead of playing the easy blame game.

Therefore, without discounting FTX’s or Terra’s role, it’s important to consider the fragmented architecture that makes crypto projects prone to liquidity crunches.

Liquidity remains locked up in silos across blockchains, staking pools and applications that don’t or can’t – share resources when required. This causes a tremendous underutilization of the total value invested in crypto-based protocols.

But at a more practical day-to-day level, fragmented liquidity means inefficient price discovery and even slippage for larger trades – an obstacle to institutional participation.

Fragmented liquidity becomes…

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