On Fragility of TradFi: Analyzing the Fall of SVB and Its Effect on Crypto and DeFi
The recent collapse of traditional finance (TradFi) institutions like Silicon Valley Bank (SVB) and Signature Bank has sent shockwaves through the financial industry. These institutions were considered stalwarts of the industry, and their failure has raised concerns about the stability and reliability of the financial system.
What Happened with SVB
SVB was founded in 1983 and was the 16th largest U.S. bank before its collapse. They specialized in financing and banking for venture capital-backed startup companies — mostly technology companies. Venture capital firms did business there as well as several tech executives.
Based in Silicon Valley, SVB had assets totaling $209 billion at the end of 2022, according to the Federal Deposit Insurance Corporation.
The collapse of Silicon Valley Bank (SVB) and Signature Bank has raised concerns about the stability of regional lenders in the US. SVB suffered a $1.8 billion after-tax loss, leading to the FDIC taking over the bank. The bank failed due to a disproportionate share of the company’s capital being held in longer-duration investments, causing concerns about its solvency and leading customers to withdraw their funds. Customers with up to $250,000 per account deposited with SVB will have access to their funds, while regulators have guaranteed larger deposits. Signature Bank was closed as the bank was one of only a handful of financial institutions that allowed customers to deposit crypto assets.
TradFi and Its Possible Effect on DeFi
The collapse of these institutions has also had a significant impact on the cryptocurrency market. TradFi institutions have been notoriously hostile towards cryptocurrencies, often refusing to offer services to crypto companies or investors. However, with the collapse of these institutions, many crypto companies and investors are now looking for alternative options.
One such option is decentralized finance (DeFi), which operates on a blockchain and allows for peer-to-peer transactions without the need for intermediaries like banks. DeFi has seen tremendous growth in recent months, with the total value locked in DeFi protocols surpassing $100 billion in May 2021.
The collapse of TradFi institutions like Silicon Valley Bank and Signature Bank has also brought attention to the potential risks associated with the traditional financial system. These risks include things like fraud, corruption, and systemic instability. By contrast, DeFi protocols are built on a trustless system that eliminates the need for intermediaries, making them more secure and transparent.
On the other hand, DeFi offers a more transparent ability even for individuals to grow their portfolio with multiple novel ways. Trade permissionless, staking, providing liquidity to a decentralized market and beyond. ENEDEX are developing towards on such features for individuals to grow their crypto as well.
Of course, the growth of DeFi is not without its challenges. There have been concerns about the risks associated with DeFi protocols, including things like smart contract vulnerabilities and the potential for hacks. However, many in the industry believe that these challenges can be overcome with proper regulation and oversight.
Overall, the collapse of TradFi institutions like Silicon Valley Bank and Signature Bank has had a significant impact on the financial industry, and it has highlighted the need for alternative options like DeFi. As the crypto market continues to grow and mature, it will be interesting to see how traditional financial institutions and DeFi protocols coexist and evolve.
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References:
- https://www.cnbc.com/2021/07/19/svb-financial-share-drop-signals-investor-concern-over-impact-of-collapse-of-hedge-fund-archegos.html
- https://www.forbes.com/sites/roslynlayton/2021/05/17/decentralized-finance-risks-and-rewards/?sh=7db9d9e45a8c
- https://www.coindesk.com/defi-protocols-surpass-100b-total-value-locked
