The digital asset market has been rocked once again by the sudden collapse of one of the biggest cryptocurrency exchanges around. FTX, led by the well-known crypto personality Sam Bankman-Fried, was previously ranked as the world’s third-biggest exchange in terms of trading volume, and its downfall has sent shockwaves through the crypto industry.
The event echoed the collapse of Mt. Gox - once the world’s most pre-eminent exchange - almost a decade ago. Although in this case, the underlying problem was not that it had been hacked, but rather that FTX just didn’t have enough liquidity on hand to facilitate a sudden spate of mass withdrawals that occurred once customers began to lose faith in the platform. As soon as the price of its native token, FTT, began falling, customers rushed to withdraw their funds from it, sending the exchange into a death spiral.
Bitcoin crashed, Ethereum crashed, and almost every other major token did the same. Then Binance stepped in, with the world’s number one exchange announcing it would buy FTX and ensure everyone gets repaid. But just as soon as the market settled, Binance announced a U-turn, saying the situation at FTX was beyond recovery.
FTX’s collapse illustrates why governments around the world have long had the crypto industry in their crosshairs. It’s an industry that, because it is in its infancy, is still extremely speculative and prone to disaster, with a long history of centralized exchanges collapsing and leaving their customers high and dry. In recent years though, the likes of FTX and Binance have sidestepped scrutiny by playing nicely with government regulators and basing themselves in low regulation jurisdictions, leaving legislators to focus their attention on a decentralized finance market that’s often said to be an even wilder west. Call it a regulatory headfake.
DeFi is the crypto industry’s name for a world that replicates all of the services found in modern finance - buying, saving, borrowing, lending, trading and investing - within a tokenized world that’s powered by cost-effective smart contracts rather than intermediaries, thus creating more opportunities, choice, and value for consumers and businesses. The lack of any centralized authority and the prevalence of scams and hacks in DeFi has gotten a lot of attention from regulators, but the downfall of FTX is yet another example of how the centralized businesses in crypto cause the most havoc. Just as FTX was run by a traditional company with a board of directors and a CEO, so too was Mt. Gox and so was Celsius Finance and 3AC - two other prominent crypto firms that recently went bust.
The rise of centralized exchanges was a necessary development in the early days of the crypto industry. They did a lot of good in terms of normalizing crypto, bringing it to people’s attention and making it accessible. In the early days, buying and selling cryptocurrencies was almost impossible for the average person, as the user interfaces for core protocols and blockchains required significant technical expertise. With the rise of exchanges like Binance and FTX, users could access a radically simpler interface with easy onramps from fiat to crypto, enabling them to buy and sell tokens with ease.
Centralized exchanges played a key role in growing crypto, but they have long since emerged as an enemy of the broader vision of crypto and DeFi as an alternative system of finance that’s more equitable and accessible to anyone in the world.
For example, Sam Bankman-Fried was notably a key proponent of the Digital Commodities Consumer Protection Act (DCCP) that many believe will bolster centralized exchanges at the expense of DeFi. The proposed legislation would bless Bitcoin and Ethereum as commodities that could be regulated by the U.S. Commodities Futures Trading Commission, thereby giving the likes of FTX and Binance a government seal of approval. Meanwhile, DeFi’s lines of code would have been left out in the cold.
Traditional finance is built on the foundations of our legal systems. DeFi will recreate those legal contracts in self-executing, decentralized code that is free from corruption, manipulation, and high fees. Since the value that DeFi will deliver to consumers and businesses is so high, it cannot afford to be ignored by regulators.
Now that one of DCCP’s biggest supporters has bitten the dust, there’s more hope that DeFi might be included within the regulatory scope. It deserves this chance, because for all of its bugs and faults, DeFi has shown far greater resiliency and a lot more transparency than any centralized institution with the crypto space. While the likes of FTX try to keep their finances hidden under the table until such a time as they can no longer disguise their incompetence, the automated nature of DeFi steers it clear of such controversies. DeFi protocols are open-source and their transactions are publicly visible on the ledger with no middleman involved, eliminating the opportunity for funds to be misappropriated or mishandled. As consumers lose confidence in centralized exchanges, it will,eventually, be the decentralized exchanges they turn to.
Consumers won’t come, however, until the numerous benefits of Web3 and DeFi such as lower costs, opportunities for greater yields and reward, self-sovereignty, and censorship-resistance are matched with the ease and familiarity of Web2 user experiences. That day isn’t here, but it is coming soon as next generation, DeFi-focused networks like Radix come online.
On the surface, the collapse of FTX looks cataclysmic. Many people have suffered irreparable harm and prices have tanked. It looks like the end of days for crypto.
However, as the famed Japanese poet, Matsuo Basho wrote, “without the deepest cold of winter, how will the plum blossom achieve its beauty?”
DeFi is the blossoming of a new financial age, bringing innumerable benefits to billions around the world. Removing the centralized exchanges is a healthy purge of a maturing ecosystem. We’re clearing the way for the true promise of DeFi to be realized. The downfall of a centrali`ed colossus like FTX removes one of the biggest blockers.
That’s a good thing for the world and it’s great for DeFi.