Is There Hope in the Aftermath of the Crypto Crash?

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Open Exchange

2022 wasn't exactly the best year for the crypto industry. With numerous crashes, bankruptcies, and lost funds, its reputation has become rather notorious. It saw the capitulation of platforms and institutions across the board from crypto banks and hedge funds to lending platforms and exchanges. The result was billions of dollars of lost customer funds and an industry-wide bear market.

Too much risk, too little transparency

Almost all of last year's collapses were a result of unbridled risk coupled with little transparency. Crypto companies like Luna, FTX, and Celsius engaged in risky maneuvers without hedging their activities properly. And when the dominoes started falling, all the skeletons came out of the closet.
What makes this worse is the fact that no one knew what was happening until it was too late. Crypto companies put up a good face and acted like everything was alright until it wasn't. By the time it became apparent that there was a problem, it was too late for anyone to do anything to save the platforms or their investors.

The collapse of that many platforms within such a short period had huge consequences.
For one, it meant hundreds of thousands of investors worldwide lost access to billions of dollars worth of funds. And two, it massively lowered the legitimacy and credibility of cryptocurrencies among the general public, which is something the industry had been trying to build for well over a decade.

This has created some big challenges. One, how does the market recover from this? And closely related, how does it provide a solution for affected customers without damaging whatever little trust remains?

While investors continue to hold their breaths and hope that appointed trustees revive bankrupt crypto companies, an unlikely group of founders has created a quicker way for investors to make their money back while learning some crucial lessons along the way.

An exchange for bankruptcy claims

As the craziness has subsided, some hope and opportunity has emerged. Several veterans of the crypto world have built a platform where customers affected by crypto bankruptcies can find some respite. Called Open Exchange (OPNX), the platform allows customers to trade their claims or use them as margin collateral to trade crypto futures.

For example, an FTX investor with a $2000 bankruptcy claim can sell their claim to someone else for a lower price, say $1000. That way, the investor gets to monetize their claim. The claim's buyer stands to make a profit once the bankruptcy is settled.

The founders of Open Exchange know more than their fair share about insolvency. In 2022, Mark Lamb, Sudhu Arumugam, Su Zhu, and Kyle Davies were at the helm of CoinFLEX (Lamb and Arumugam) and Three Arrows Capital (Zhu and Davies).

These crypto companies went bankrupt last year, making OPNX the brainchild of founders whose previous companies failed and, like FTX, left their users in lots of trouble.

This presents a conundrum to customers should they trust a solution from people who, whether intentionally or not, helped create the problem? Well, according to OPNX, they have learned from their past mistakes, making them the best team to build the platform.

Leveraging Blockchain to bring back transparency

Transparency is the biggest lesson learned from last year's woes. If the crypto companies were transparent, executives would never have the courage to take huge risks. And even if they still go ahead and do so, investors will know and have the opportunity to take measures to protect themselves.

Transparency is, therefore, the principle that should guide the next generation of crypto solutions. Decentralized exchanges (DEXs) are a good illustration that it works. They never experienced any of the problems of centralized exchanges (CEXs) because they are built on transparent, public blockchains.

OPNX has taken a page from this book by taking a Web3 approach. The claims trading solution will, through tokenization, emulate the advantages of blockchain technology.

Through their tokenization solution provider, Heimdall, OPNX will help users tokenize their bankruptcy claims. This involves standardizing similar claims into a fungible token that participants can then freely trade on the exchange or use as margin collateral for trading.

Tokenizing claims has some big benefits it increases the liquidity and price transparency of the assets. That way, the claims will be accessible to a wider range of investors at lower costs.

But, the most important thing is the question of transparency. Soon, OPNX will feature an open database that will make the liquidation prices of each user and aggregate exchange data publicly available to all users. It will also provide proof of solvency for on-chain funds to ensure complete transparency.

If that's true, stakeholders don't really have to trust the founders to trust the platform. All the information they need to feel secure will be readily available to them in real time.

If the future is transparent, the future is safe

The only way to ensure the events of last year never unfold again is to make transparency the standard of crypto operations. And to that end, it is encouraging to see those who were part of the problem be the first to learn and build better solutions. As more founders adopt this approach, the future of crypto looks like a much safer place to be.

This article was first published on June 26, 2023