Raoul Pal – former Goldman Sachs hedge fund manager and founder of Real Vision – a financial consultancy and media platform tweeted on 25 May that the last week’s crypto carnage, which saw the prices of most assets, decline by over 40% was actually a stress test for the crypto-world and especially decentralized finance (DeFi). He reiterated that it actually shows the “resilience” and the supremacy of DeFi over traditional finance.
Beneath the head line:
Crypto had a major, major VAR-shock test and NOTHING happened.
Leverage liquidation was offset by overcollateralisation. No one was left holding the baby.
No firm went under.
The Fed didn't need to step in.
Defi didn't break and carried on near normal
Crypto markets saw one of their trade-mark bloodbaths, where the asset prices suffered double-digit losses, stablecoins went off-peg, certain centralized exchanges went offline, and massive liquidations all across the board. However, nothing much happened. No circuit breakers were active to halt trading and the protocols performed as expected. Raoul Pal was amazed.
This is what I first saw in crypto back in 2012. A new, anti-fragile financial system that doesn't break in times of stress, where ownership of assets is clear and losses are not mutualised to tax payers.
This was a big two weeks for crypto and for the future financial system.
Some of the centralized exchanges have trouble maintaining uptime in these periods of turmoil and severe volatility. DeFi protocols seem to have learned their lesson from the COVID-induced notorious market collapse of Mar 13, 2020. They suffered from high processing times and prohibitively expensive fees, but none of them went down under. 100% uptime! Perhaps, there is hope for DeFi and the potential for a further rapid rise.
Raoul Pal argued that a similar event in the traditional finance world would have required interventions and Govt’s managing the market. They would require tax money for countering losses to otherwise private players, cash injections, and major firms needing immediate funding. According to him, this is a result of clear ownership of assets in DeFi and mass over-collateralization, containing the damage.