Will the US Treasury Ban on Tornado cash Kill DeFi on Ethereum?
In todays article I speculate a bit on the death of Defi on Ethereum. I know some will dismis the title as clickbait, but in reality we are witnessing a series of huge events.
Theb summer of 2021 to 2022 saw the huge rise of defi from a 100 million dollar industry to a 100 billion dollar industry.
Then we saw gas prices, more commonly known as transaction costs on Ethereum based DeFi soared from 4 dollars to 100 dollars, and at peak times 400 dollars.
We saw the rise of a competing ecosystem on Binance which has become a 100 billion dollar ecosystem, as investors fled high gas prices on Ethereum to lower gas prices and higher APRs on many Defi projects on Binance.
We have seen the continued loss of investors to Polygon as this new alternative to Ethereum became a multi-billion dollar ecosystem, and likewise the rise of Avalanche, Solana, Cardano, Arbitrum, Thorchain and Cosmos. Investors have choices and they are exercising them.
And while the ethereum faithful stay on Ethereum proud of it's famous decentralization, forces from within and without have conspired to form a perfect storm. Which may spell it's doom.
Terraluna showed us that an ecosystem of billions of dollars could die in a day. And millions of investors could wiped out, as in losing all their money. Many became suicidal and others committede suicide.
Now we are faced with the specter of randomly having all your funds on Ethereum frozen indefinately under a new rule from one country, which is having global effects; freezing the cryptocurrency accounts of famous celebrities in the US and famous crypto projects creators in Asia.
The irony is that while the US government may have lit the match, the Defi projects on Ethereum themselves have lit the flames, which may develop into a fire which consumes them.
How the Tornado Cash Ban can kill DeFi on Ethereum.
- Three little letters FUD, but three powerful words:
- Fear
- Uncertainty
- Doubt
- If you have been a trader in large markets you know this acronym FUD very well.
- It is synonumous at times with market sentiment, and most trading books tell you the market is always right.
- In cryptocurrency the markets are smaller and much more volatile then traditional trading markets, and the effects of market sentiment are thus magnified.
- If we learned anything from the death spiral of Terra Luna it was the power of FUD to trigger mass panic and mass selling of assets, and like lemmings leaping off the cliff, once the mass hysteria start's it's impossible to stop.
- This famous quote from Do Kwon: Steady Lads in the face of overwhelming FUD and Panic will go down in history for both it's coolness and ineffectiveness.
- Well I think we are about to have a FUD moment, and we will need more then someone rich and famous saying Steady Lads to reassure the trading masses not to mass panic and move their money off ethereum.
Fear
- Right now the US Treasury has created FEAR amongst traders on Ethereum, who are paying attention, and are becoming concerned about whether someone will find their public wallet address and send them some Ether Dust via Tornado cash.
Uncertainty
- Next the supposedly decentralized deFi applications on Ethereum, which have developed a plan to automatically freeze the accounts of people on their applications, if their wallets interact with Tornado Cash by sending or recieving transactions.
- Thus they are creating a scenario where everyone is guilty, regardless of WHO initiated the transaction, as the WHO cannot be known, as by definition, the WHO are anonymous. Only the recipient is known.
- Thus many celebrities or well known traders with money in the big famous DEFI applications on Ethereum are vulnerable to having all of their funds frozen at any time, regardless of whether they have actually done anything wrong.
Doubt
- It is not clear that this situation, where anyone can be sent Dust Ethereum and have their account frozen will be rectified anytime soon.
- The general attitude of the DeFi applications on Ethereum is exuberant compliance with government authorities.
- And the companies they are using have a conflict of interest, as many if not all of them are making money by working for the government, and now are working for the decentralized protocols.
- But seemingly NOONE is working for the investors!
- Anyone who has had to deal with the US Government, or any government for that matter, knows that the government moves at it's speed, which is generally very slow.
- And if your life savings and rent money are frozen, you might get evicted for failure to pay your rent before this matter is settled.
Fear, Uncertainty and Doubt
The Fuse is lit, the flames are fanned, and now we get to watch the forest fire rage. -
- The US Treasury department lit a the FUSE of FUD with the Tornado Cash ban and Sanctions.
- But the so called decentralized applications on the Ethereum blockchain that got together and started utilizing wallet screening protocols which can't distinguish true wallet owner initiated interactions with Tornado cash from Phony or Spoofed ones, are fanning the flames of FUD, which may break out into a Forest Fire and burn their applications down to the ground as investors flee to non-ethereum defi applications.
Why?
Anyone with money in a decentralized finance application on the ethereum blockchain can be dusted, and have their funds frozen.
Anyone.
These screens make no distinction.
In fact, there is money to be made here... Money made shorting assets is a very good reason to start researching those wallets with large loans, send them dust from Tornado cash, watch their wallets get blocked and their loan accounts frozen, and then short the collateral, trigger liquidations and those loan account owners will be blocked from interacting with their loans and they will be liquidated.
This will trigger a cascade of defaults, liquidiations, massive selling pressure, asset prices will drop, and more liquidations will occur.
Once word gets out of this vulnerability, large accounts run by smart people will withdrawal their funds and leave the ethereum blockchain.
DeFi on Ethereum could become a ghost town.
Think it can't happen?
- No one anticipated the rapid collapse of Terra Luna either.
- Mass panic
- Flammable FUD
- Death Spiral
- Millions of investors lost Billions of dollars
- I think investors are more scared and more likely to react out of fear now, then at any time in the history of cryptocurrency.
- No one has to tell investors that no one is looking out for them..they know that no one is looking out for them!
It feels like a Perfect Storm
- The huge losses of Terra Luna are still fresh in everyones mind.
- A multimillionaire gets his funds frozen!
- Who is safe if a millionaire who builds crypto stuff isn't safe?
- I think the answer is.. no one is safe, even funds on decentralized protocols are being frozen.
- The defi apps on ethereum are making a mockery of their claims to be decentralized.
- The Defi apps on Ethereum may be digging their own grave.
- No one cares what you say, they care about what you do!
- Unless those centralized defi applications on ethereum act to reassure traders we may be witnessing a huge shift or movement of capitol to Binance and possibly Polygon, Avalanche or Solana.
- Who knows Cardano may even get their defi act together in time to take advantage of this huge catastrophe.