DeFi
FTX showed the problems of centralized finance and proved the need for DeFi
Our community continues to learn the hard way the lesson of decentralization. Celsius Network. BlockFi. Digital traveler. Now FTX.
These are all centralized exchanges (CEX) and centrally financed platforms (CeFi). Their business models are centuries old; the only new thing about them is that they offer users exposure to crypto assets – but importantly, not root ownership, since they hold the keys to those assets.
Amanda Cassatt is the founder and CEO of Serotonin, a Web3 marketing agency and product studio.
Like the financial institutions that collapsed in 2008, their economic incentive is to undercollateralize and take risks with user funds. They play political games, cozying up to regulators who claim to care about consumer protection.
Pseudonymous developer Satoshi Nakamoto was inspired by the events of 2008 when creating Bitcoin that year. When the network was launched, they wrote these words in its genesis block, “The Times 03/Jan/2009 Chancellor on cusp of second bank bailout”.
This headline from the Times of London sent a powerful message about Satoshi’s intentions: large financial institutions had spent years privatizing the gains from risk-taking, leading to collapse, and once that happened happened, they forced the public to bear their losses through their influence over politicians. with discretionary decision-making power.
With Bitcoin, Satoshi changed the locus of decision-making from politicians to an automated code base, giving ordinary people the ability to participate without permission in an alternative financial system, where the rules are public, apply to everyone and run automatically. Then, with smart contracts, Ethereum-based decentralized finance (DeFi) brought these benefits in various forms to hundreds of thousands of people.
Echoing the financial collapse of 2008, the collapse of FTX and Alameda Research sparked a “bank run” in crypto markets. Some CEX and CeFi platforms are overwhelmed by users withdrawing funds, forcing them to freeze transfers out of the platform. Some must be insolvent.
Those who have funds on FTX will likely lose their money. A number of large venture capital firms as well as Web3 companies told their investors on Wednesday that a significant portion of their assets under management [assets under management] or cash was lost to CEXs. It is difficult to learn the basic hygiene of keeping minimal funds on CEX only for immediate transactions.
Despite the massive sell-off, Uniswap, Balancer, Curv and other decentralized exchange (DEX) and decentralized finance (DeFi) platforms are operating smoothly, allowing users to exit their crypto positions or, if they prefer, to capitalize on the low prices and buy. Users may have seen their wallet value decline in dollar terms, but they never lost access to their assets. If that’s not consumer protection, I don’t know what is.
When I was at ConsenSys and we first introduced Ethereum to the world, we had a sign at our events that said, “Welcome to the decentralized future.” Our community was then, and still is, asked to explain the use of this new technology. The best answer was and remains decentralization.
DeFi platforms are designed to preserve the advantages introduced by Bitcoin and amplified by Ethereum: permissionlessness, transparency, censorship resistance and self-sovereign custody of assets.
Users should insist on a base settlement layer for economic activity that is as decentralized as possible, to avoid exactly the scenario that has occurred in recent days. History may not repeat itself, but it certainly rhymes — and we would do well to heed the lessons it teaches.
Like the large financial institutions involved in the 2008 collapse, which donated generously to political campaigns, the cryptocurrency exchange FTX has spent its last few weeks spending lavishly with legal regulators. Its founder and CEO, Sam Bankman-Fried, even had the audacity to say that DeFi needed consumer protections while, as has become clear, gambling with user funds.
Consider for a moment that SBF operated the second largest CEX and that centralized platforms view DeFi as a competitor. What it wanted from regulation was not consumer protection, but rather protection of its current position and strengthening its competitive advantage.
Regulators are paying attention to this collapse, as is their job. Those with good intentions should see through the Times Square billboards about ESG. [environment and social governance] and fancy parties and understand that the centralized actors who are calling for DeFi regulation are doing so because it serves their interests. Regulators should also recognize that when it comes to consumer protection, DeFi has CeFi beat time and time again.
Regulation that would not overprotect incumbents or harm truly decentralized projects could be a boon for the sector, providing the clarity that waiting institutional investors need to begin deploying capital. This could rid our space of many of its scams by making it riskier to perpetrate.
If there is a positive side to the FTX fiasco, it is a reminder of the importance of decentralization. While it took a massive blow to all crypto prices, layer 1 blockchains that deprioritized decentralization as a design goal were hit the hardest.
The collapse of FTX was a failure of CeFi, not DeFi – and smart investors, builders and users have already taken note. I think many have learned their lesson this time. To them: welcome, once again, to the decentralized future.