Cryptocurrencies, the crash of Ftx and the risk of contagion

The upside is that Genesis mainly deals with institutional clients, such as family offices (companies that manage the wealth of wealthy families), high net worth individuals or hedge funds. In the event of bankruptcy, therefore, even if trust in the sector could be seriously damaged and the knock-on effects could put other companies in difficulty, the immediate impact on customers would not be as severe as in the case of Ftx.

Max Galka, founder of blockchain analytics firm Elementus, reports that data suggests the company is “less linked than Ftx” to the big operators in the sector. Even if there will be “a domino effect“, a collapse is therefore unlikely to have the same cascading effects.

Joe Flanagan, co-founder of decentralized lending protocol Maple, points out that the potential collapse of Genesis would not be “so extensive“, why the The company’s financial deficit is much smaller than Ftx. Furthermore, according to Flanagan, the bankruptcy procedure would probably be easier thanks to the clear separation between the internal divisions of Genesis, which means that the unit in difficulty, the one that deals with loans, could be spun off.

It assists decentralized platforms

The biggest impact will likely be felt in the cryptocurrency lending market; just as Ftx’s collapse drew attention to the benefits of decentralized exchanges, the Genesis case could potentially drive people to decentralized lenders, which allow customers to see exactly what is happening to their assets, an example of so-called decentralized finance, or DeFi.

Furthermore, to minimize the possibility of insolvency, the majority of decentralized lenders only offer loans that envisage giving assets with a higher value than those requested as collateral, the so-called overcollateralized loans. Genesis instead seems to offer riskier unsecured loansa practice that may have contributed to his current financial difficulties.

Harrison argues that lenders like Genesis do not offer the transparency afforded by the DeFi approach. In his view, the current situation may have two outcomes: or the”DeFi ethics” transparency and loan guarantees will be adopted by centralized lenders, or decentralized lenders will start taking customers away from them. Galka goes so far as to say that ”lending of cryptocurrencies by centralized services is essentially over“, due to what happened to lenders like Genesis.

Meanwhile, the fallout from FTX’s bankruptcy continues to be felt. As the effects on Genesis and other FTX-related companies (such as BlockFi and Voyager Digital) begin to materialize, several other companies may have significant losses that they have not yet disclosed, Galka said. “It may take a year or even more before really know how much the contagion has spread“.

This article originally appeared on Wired UK.