Note that this year ended with serious losses for cryptocurrency entrepreneurs. According to Forbes analysts, 17 prominent industry figures together lost around $116 billion. A record $41 billion of this amount went to Binance chief Changpen Zhao.

Binance chief executive Changpen Zhao

More details of the ranking can be found here.

Hacking of blockchain bridge Ronin

Axie Infinity is one of 2021’s blockchain game discoveries. The project gained enormous popularity in just a few months due to its successful implementation of the Play-to-Earn principle and pleasing graphics. In other words, users could earn from their activity, which attracted a lot of attention.

Due to the high load, the developers had to resort to a second-tier Ronin solution, which ensured fast player interaction with the Ethereum blockchain.

Axie Infinity interface

However, already in March this year the Ronin bridge was hacked: then hackers stole 173,600 ETH and 25.5 million USDC in two transactions. The loss amounted to $625 million according to the Ether exchange rate at the time. It was later revealed that the hack was carried out by the North Korean hacker group Lazarus.

According to Cointelegraph’s sources, the main vulnerability was the lack of a suitable decentralised network for the game’s developer, Sky Mavis Studios. Hackers gained access to the private keys of five of Ronin’s nine validator nodes, allowing them to compromise the network. By gaining control of five nodes, the hackers essentially controlled more than half of the network’s validators and were able to accept or reject any transactions. This gave them the ability to “write themselves a cheque” for Ronin users’ money.

The announcement of the Ronin hack

Most interestingly, the incident was not noticed immediately, but only a few days later, when a bridge user reported problems withdrawing a particularly large batch of tokens. Some time later, the Sky Mavis team managed to partially compensate for the losses of the hacker attack – the developers raised more than $150 million in funds to compensate customers for their losses.

Terra ecosystem collapse

On May 7, strange things began to happen in the Terra project ecosystem. Its algorithmic stabelcoin TerraUSD (UST) lost its peg to the U.S. dollar, dropping in value markedly below the dollar. A little later, the value of the native token LUNA literally “poured out” and collapsed by almost 100 per cent in a few days. So what happened?

Before its collapse, UST was the market’s most popular algorithmic stablcoin. Unlike traditional stablcoins, where the peg to the currency is ensured by the existence of reserves at the issuer, UST parity to the dollar was ensured by smart contracts and a special linkage to the aforementioned LUNA token.

LUNA exchange rate over time

Every time someone received $1 in UST, the same amount of LUNA was burned using smart contracts - and vice versa. That is, when the price of UST falls below $1, traders are encouraged to burn USTs, or withdraw them from circulation, and receive LUNA tokens at a reduced rate. In the reverse situation, users have an incentive to burn LUNA.

Terra creator Do Kwon

More than 2 billion UST were withdrawn from the Anchor Protocol platform on 7 May. Anchor Protocol is an ecosystem-based cryptocurrency lending service. Due to the large volume of withdrawals, the UST price deviated from $1, falling to $0.90 at first. Overall, the balance was upset: users could now burn $0.90 in UST for a dollar in LUNA. The situation is perfectly illustrated by the chart of the UST price at the time of the collapse.

UST collapse

After this collapse, exchanges started suspending trading in LUNA and UST due to high volatility. This further hit the liquidity of the tokens, resulting in the final demise of the project. Its creator Do Kwon tried to rehabilitate Terra by releasing a second version of Stablecoin and LUNA. However, this didn’t help investors – according to preliminary estimates, their losses reached $60 billion and they weren’t able to restore at least a decent portion of this amount.

The collapse of hedge fund Three Arrows Capital

Terra’s collapse significantly affected cryptocurrency hedge fund Three Arrows Capital (3AC), which had a peak market capitalisation of more than $560 million. 3AC from Soo Joo and Kyle Davies has invested a significant amount in several distressed cryptocurrency projects, including the aforementioned Axie Infinity game and the centralised blockchain platform BlockFi.

Three Arrows Capital crypto fund co-founder Su Zhu

The UST collapse undermined investors’ positions and accelerated the market’s decline. 3AC was in a terrible position: yet just before LUNA collapsed itself, the hedge fund had invested around $500 million in it. The total devaluation of the token dropped the liquidity of Three Arrows Capital’s reserves, causing the hedge fund to declare bankruptcy.

That said, just a couple of weeks before this event, 3AC had the equivalent of billions of dollars in crypto assets under management.

The fall of Voyager Digital

The bankruptcy of Voyager exposed a serious problem in the crypto industry – the over-reliance of different centralised platforms on each other. Voyager Digital filed for bankruptcy on 6 July due to the collapse of Three Arrows Capital. Prior to this, 3AC had obtained a substantial loan from Voyager without any collateral. When 3AC defaulted, Voyager lost a significant amount of customer money.

Voyager Digital

Trading, withdrawals and deposits on the platform were suspended. A little later, Voyager representatives told the public that the Three Arrows Capital fund would not be able to repay the loan. Most interestingly, in June FTX founder and former CEO Sam Bankman-Fried wanted to provide Voyager with a $500 million line of credit to help the project survive the market crash.

Voyager Digital owed between $1 billion and $10 billion to more than 100,000 debtors. Proceedings to liquidate the remaining assets and compensate those affected by the platform's collapse are still ongoing.

Celsius liquidity crisis

Until September this year, the most popular altcoin, Etherium, operated based on the Proof-of-Work (PoW) algorithm. The developers of Ether were preparing to switch to the Proof-of-Stake (PoS) algorithm, which is based on the activity of validators. They maintain the Ethereum network with a deposit of at least 32 ETH.

Those who wanted to become validators even before the PoS transition could deposit coins into a smart deposit contract with the condition that they would be unlocked in the future. Therefore, various platforms offered through them to deposit ETH into a smart contract for a fee, with the condition of issuing "synthetic" ether counterparts at the same price. One such platform was Celsius.

The logo of the Celsius trading platform

Celsius issued stETH to its customers in exchange for their ETH. All was well up to a certain point, until the price of stETH began to fall relative to the price of Etherium. In this situation, Celsius faced a liquidity crisis – due to the falling stETH price, the platform simply could not meet all of its clients’ withdrawal requests.

On June 12, what many customers feared happened – Celsius suspended withdrawals. Users understandably thought that Celsius had declared bankruptcy and would not be able to refund money at all. The value of the native CEL token dropped by 70 percent in just a few hours and dropped even more in the following days.

Due to worsening cash flow problems, Celsius announced on July 3 that it was laying off 23 percent of its staff. Unfortunately, the company was never able to stabilize its financial situation and filed for bankruptcy on July 13.

Bankruptcy of cryptocurrency exchange FTX

A couple of weeks before the official announcement of FTX bankruptcy the financial report of the trading company Alameda Research, which was closely related to FTX, was leaked online. In it, experts noticed serious problems with the company’s sustainability. This prompted a massive sale of FTT’s native tokens by cryptocurrency exchange Binance. In addition, FTX customers began actively withdrawing their coins from the trading platform.

As a result, FTX founder Sam Bankman-Fried contacted Binance CEO Changpen Zhao and offered to buy his exchange’s assets to save the day. Zhao later admitted he could not take such a step as FTX’s financial problems were far more serious than many first thought.

Ex-CEO of FTX Sam Bankman-Fried

FTX then restricted crypto withdrawals, which only fuelled panic in the cryptocurrency community. Finally, on 11 November, a bankruptcy filing was made against the exchange. Along with it went the trading firm Alameda Research, also founded by Sam Bachmann-Fried, to the bottom. A few days later it emerged that Alameda had regularly borrowed funds from FTX, including its clients’ money. Both organisations had serious problems after the collapse of Terra in spring, but FTX and Alameda somehow managed to survive the last few months with clients’ money.

A few weeks after the collapse of FTX, another co-founder of the exchange, Gary Wan, and former Alameda Research executive Caroline Allison were involved in a lawsuit. Sam was released on $250 million bail and both Wang and Allison have begun actively cooperating with the investigation, pleading guilty.

The downfall of the blockchain platform BlockFi

Another cryptocurrency exchange, BlockFi, filed for bankruptcy on 28 November. With assets and liabilities between $1 billion and $10 billion, the company had more than 100,000 creditors. It also had a $275 million debt to Sam Bankman-Fried’s US subsidiary FTX US. The bankruptcy filing also stated that BlockFi’s largest customer balance was $28 million.

Mistake on BlockFi’s website

Notably, this year BlockFi agreed to accept a loan package from FTX worth up to $400 million because of the aforementioned Terra collapse. This made BlockFi dependent on FTX already, well the bankruptcy of the Bankman-Fried exchange was the final blow to the company’s stability.

While 2022 has been an extremely difficult year for the crypto market, there is a positive side to it one way or another. Investor sentiment seems to have stabilised, well crypto has always recovered from previous bearish trends, bankruptcies and other incidents. Accordingly, in theory, this year's events could pave the way for new platforms to learn from the mistakes of their predecessors. One would like to believe that this will eventually be the case.