While mainstream coverage of cryptocurrency has been overwhelmingly negative in the wake of the collapse of the Terra ecosystem, the bankruptcy of Celsius and the fall of Three Arrows Capital, these events ultimately show why more of the financial system should operate on-chain, bringing more transparency and information to market participants.
In all three cases, the damage was caused and exacerbated by opaque, off-chain entities. And while the reason for the trio of events is important, it has also caused considerable damage to the overall reputation of the industry. These events have made it clear that the industry is in need of more transparency, something that can be made possible with more on-chain data and data analysis tools.
Proponents of blockchain technologies often tout their transparency: the networks are treasure troves of open, incorruptible financial data allowing for economic activity to be measured with an unprecedented degree of accuracy. This new technology creates immutable records of all transactions where sentiment and investor behavior can be measured through the collection and study of data.
On-chain data gives us insight into market events
On-chain data analysis has become essential in the blockchain space. By looking at transaction data and crypto wallet balances, we can gather valuable insights into market conditions. This is crucial for participants and investors trying to plan their next move. Not only does data tell a story of the market’s past, but it allows each and every investor to make an informed decision before initiating any trades or interacting with the market.
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The importance of analytics platforms has become more apparent than ever before — they are essential for learning from our mistakes and understanding weaknesses within the blockchain ecosystem. The events leading up to Celsius’ collapse and the unveiling of 3AC’s holdings were researched and analyzed thoroughly by analysts and media alike. Research has helped specifically to paint a picture that outlined where the contagion started and how it spread. This was only possible because some of that data was on-chain. If 3AC and Celsius had a full picture of their holdings on-chain — similar to a platform such as Aave which anyone can audit and verify collateralization — fewer investors and creditors may have been duped.
Similarly, on-chain intelligence plays a role in real-time market movements, not just in analyzing the past. Data that provides users near real-time information about the movements and positions of the industry’s most important and largest players proved to be essential when Terra USD (UST) lost its peg. Organizations with insights into this data managed to avoid the worst of the UST de-peg.
Leveling the playing field
On-chain analysis offers the promise of equal access to information and is not based on hype, sentiment, or technical analysis. This type of analysis can be focused exclusively on data, where the major benefit of on-chain metrics is that they explain investor behavior and network health in real-time. Additionally, on-chain data levels the playing field by making the strategies and activities of top participants public knowledge.
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Transparent data is a core feature of blockchain networks. While the collapse of Luna, 3AC, Celsius and others was treated as a validation of the belief that it is an ecosystem of “shadowy super-coders” where criminals and scams flourish, the reality is that these entities only managed to harm investors because such large elements of their operations were off-chain.
Ultimately, the antidote to crypto contagion is not regulation or law enforcement, but in bringing more financial infrastructure on-chain where it can be analyzed and used by the wider public.
John Calabrese is the head of product at Nansen, a blockchain-analytics firm. He holds more than 10 years of experience in product management and previously worked for companies in the finance technology space including FIS and Fidelity, and at startups such as Cinch and Monit. John has roots in traditional finance, earning his CFA and FRM designations, but is most passionate about the future of finance where products are more decentralized, transparent, and efficient through blockchain technology. When not working or trading crypto, John can be found at home spending time with his Shiba Inu, Nutmeg.
The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.