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ÂTrust is a two-way sword for crypto. Trustlessness is a foundational principle in this domain. But crypto-powered systems must also be trustworthy enough for users and investors to participate.
Can the two co-exist? Yes, indeed, since trustlessness is a technical feature while trustworthiness is social.
A system is trustless if it can function efficiently without requiring users to trust each other. However, it’s trustworthy if users can rely on it to function transparently, securely and consistently.
Given the series of systemic failures and malpractices witnessed in 2022 from Terra to FTX crypto innovators must commit to trustworthiness in 2023. That’s the only sustainable way forward for the industry to regain investor confidence and ensure adequate consumer protection.
It’s easier said than done, but thankfully, the tools to ensure systemic robustness and consistent performance are already available. The need of the hour is to use them with integrity and a forward-looking approach.
Crypto can’t afford the cost of mistrust
Trust is easier lost than gained articularly in a nascent tech-driven industry like crypto that already has an abundance of critics and naysayers.
Belief in the future potential of crypto-based systems is key to their success. Some call it speculation but it’s such a belief that inspires early adopters to jump on the bandwagon.
Be it HODLing despite market downturns or acquiring property in the metaverse, crypto thrives on the promise of a better future.
The beauty (and significance) of it all is that it’s actually possible and not merely a myth. This is also why it bounced back time and again despite volatility, regulatory onslaughts and whatnot.
But everything lies in jeopardy when respected and revered faces end up on the wrong side of the profiteering game.
Severe allegations and revelations thus shook the industry’s core in 2022, with massive ripple effects that may continue throughout 2023. The trust was hampered significantly  if not lost completely.
Unfortunately, recent fiascos imposed a hefty price on the hitherto burgeoning crypto industry. The total financial losses across protocols amounted to over $3 billion in 2022.
And now layoffs are continuing en masse, with more than 26,000 employees losing their jobs. That’s essentially the price of mistrust something the industry can’t afford to pay for long.
One must look the devil in the eye
Establishing trust is neither rocket science nor child’s play. It’s about prioritizing progressive norms like transparency, integrity, accessibility and security.
But this can be achieved only by identifying the existing loopholes (i.e., the roots of crises). One can’t possibly solve problems without understanding their causes. Unless, of course, they are content with ad hoc solutions.
The dwindling investor confidence and mistrust in the crypto industry today have many reasons. Greed is perhaps one of them.
But more concerningly, it’s due to the liquidity fragmentation inherent to the current landscape. Crypto exchanges and protocols can rarely interact, let alone share liquidity a recipe for doomsday.
Several exciting avenues have emerged recently, from crypto-collateralized loans to high-frequency, algorithmic trading to stablecoins. Yet, it’s been impossible to actually tap their collective value so far since crypto assets remain locked up in isolated silos.
Although innovations to boost interoperability and composability are well underway, there’s still a long way to go in this direction.
Inadequate liquidity besides blatant misappropriation is currently among the greatest threats to systemic integrity in the crypto industry.
It’s thus necessary to implement smart systems for deep liquidity aggregation across centralized and decentralized exchanges.
Such solutions must also be intuitive and user-friendly, minimizing friction to the greatest extent possible. And they must be transparent enough to disincentivize fraudulent activities.
Smart order routing can join the dots
Liquidity points on the crypto landscape are like stars in the night sky scattered, almost distant. But it’s possible to join the dots and let the constellations emerge.
SOR (smart order routing) is one potential method in this regard. Though it can’t curb malintent, it can ensure the best execution of crypto trades.
SOR’s most immediate and practical benefit is optimal price discovery for traders. However, its implications extend far beyond this point. SOR systems enhance liquidity distribution.
That too, without hampering healthy competition between exchanges and marketplaces. Instead, SOR enables the much-needed liquidity interactions between crypto platforms and ecosystems.
Combining AI (artificial intelligence) makes SOR even smarter, facilitating low-latency order matching and execution with minimal risks.
This can boost investor confidence and consumer protection by providing hedge exposures, deeper liquidity and lesser slippage. Rapid trade execution also allows for prompt exits when inevitable, adding another buffer for crisis-stricken investors.
Making AI and SOR-powered systems the norm will let the crypto industry build systemic integrity from the ground up. This can also be a means to eradicate liquidity crunches for good.
Of course, that’ll happen in the long run, one step at a time. But even at this moment, such progressive systems are crucial to making crypto reliable again.
Finally, setting the right standards and adhering to them is the way for crypto to regain the lost trust. That’s why it needs sustainable innovations from dedicated and level-headed innovators.
One must get into crypto for the long haul rather than trying to make off with quick gains.
Because actions that destabilize trust and integrity aren’t good for anybody, the sooner this becomes a part of the crypto community’s collective realization, the better it’ll be for the future.
Ahmed Ismail is the CEO and president of FLUID, a liquidity aggregator that uses AI quant-based models to tackle fragmented liquidity in virtual asset markets. Ahmed has 18 years of experience at some of the biggest financial institutions globally, including Bank of America, Credit Suisse and Jefferies. After his time at Jefferies as the US investment bank’s youngest-ever regional CEO, he co-founded HAYVN.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
Featured Image: Shutterstock/Modvector/Sergey Dzyuba
