FTX, one of the biggest exchanges in crypto, has not done the industry any favours over their disaster. While the situation is very complex, the key points are: FTX started having trouble amid concerns over its ability to keep operating. Binance began talks to acquire FTX, which would allow Binance to be the clear CEX winner and would essentially rescue the many customers of FTX, giving them more faith in their investments.
In a stunning blow, however, Binance suddenly pulled the rug and cancelled the deal…while performing their due diligence process. This did NOT look good for FTX, as Binance already had the leverage on the deal is in the stronger position (Binance could choose to say yes or no, but FTX needed Binance to say yes to the deal). It doesn’t take a genius to hear the alarm bells in a situation like this, as it was evident that although they didn’t say what, Binance had likely found some numbers that didn’t add up.
FTX customers were paying close attention, and this jolt of insecurity quickly caused a run on the holdings of FTX. The FTX community wanted out, and quickly. That said, it wasn’t that simple for most customers because FTX suddenly threw a freeze on all assets, preventing customers from accessing their own money. At the same time, FTX declared bankruptcy and a few hours later claimed to be hacked. The anxiety felt by investors turned to outright terror (and fury) as billions were suddenly out of the hands of their owners and quite possibly gone forever.
FTX’s Damage to Crypto Is Worse Than You Think
What a complete train wreck for the crypto industry.
This certainly stirs a variety of emotions in those fans of crypto and the true believers who see a world where crypto has a full seat at the table of global finance. Especially during a bear market, this type of fiasco creates major damage for the entire crypto industry. When the community goal is mass adoption, this is the worst possible event, because only part of the picture makes it to mainstream news channels, who will lump all of “crypto” into the same category as FTX, and will associate all the risks with the industry as a whole. This type of ignorance is incredibly frustrating, and the non-tech news channels have shown a shocking lack of fact checking when it comes to crypto stories, especially those with bad news.
Let’s take a moment to clear up what happened with FTX, its root causes, and why the industry has been moving away from FTX and others like it for some time. There were no surprises as to the risks behind what happened to FTX. Let’s dive in and see how to avoid them completely.
Why Did This Happen?
We’ve discussed the effects of the FTX crash above, but what of the root causes? We will mention some intermediate causes, but one true root cause: FTX was a centralized exchange. This is at the heart of some of crypto’s worst hacks, frauds, and failures. While a highly regulated environment like what we see in traditional finance is built around centralized exchanges, it simply can’t work as well when the industry is much less regulated, is more global, and the regulating bodies have not even discovered all the ways that fraud/theft can be committed. For FTX, centralization meant that FTX could control the records, and transparency was greatly hampered. Centralization meant FTX had access to customer funds; they could conceivably take it and easily freeze it (which they ended up doing). This already generated the growing snowball effect that led to the bankruptcy, but the “hack” that was done hours after this, is still under investigation and is highly suspicious due to the timing. While not confirmed, it does make sense that someone with inside information could have prepped to perform unauthorized transactions to move as much money as possible out of FTX and into somewhere they had control of, all in the midst of the bankruptcy chaos. As it happened merely hours after the announcement, it’s unlikely that it was an outside reaction from the public announcement. And because FTX was centralized, all of this was made possible.
How Do We Prevent This Permanently?
Simply put, all of this could have been prevented through decentralization. However, while true, simply switching to decentralization doesn’t prevent all risks with using cryptocurrencies. DeFi platforms also hold their risks, from ICO pumps and dumps, DAOs that are too small and therefore vulnerable, and adverse trading behaviours. These elements require a high-quality DeFi solution that has solved many issues by being decentralized but has also addressed specific DeFi concerns. One of the most extreme cases of this pursuit has been Radix, which has been careful to note they are not a blockchain but an asset-oriented smart contract platform purpose-built for DeFi. This is a subtle but important distinction, specifically because Radix’s key passion is understanding the risks currently still inherent in DeFi, and solving them by rebuilding the smart contract platform from the ground up. After many different attempts over nine years, they believe they have the answer. This type of dedication is good news for DeFi and crypto as a whole, and we can only hope it can counterbalance the messes made by those like FTX. The Radix team plans to lay out their views on the inevitable future of DeFi in a video conference on December 8th.
A Bright Future…?
While there are certainly some dark clouds in the sky right now, we know that FTX only shows that the major shift to DeFi over the last few years has been the right way to go. The industry will continue finding vulnerabilities, patching them up, and learning from mistakes. With platforms like Radix willing to play the long game to make this happen, we may very well have blue skies ahead once again.