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Can FTX-like Situations be Avoided?

A knowledge of history reveals that cryptography is not on the verge of extinction but rather is transitioning toward new technologies and expanding.

Photo by Kenny Eliason / Unsplash

The sudden collapse of FTX (1) has prompted all crypto investors to question the viability of cryptocurrency and, in some cases, to forecast its eventual demise. However, a knowledge of history reveals that cryptography is not on the verge of extinction but rather is transitioning toward new technologies and expanding.

The movement of the financial markets occurs in stages and phases, as well as in circles and cycles. Companies generate new ideas, experience rapid growth, incite undue optimism among investors, and ultimately fail, only to prepare the ground for the next firm, the next concept, and the next period of growth. Cryptography is not an exception.

In 2010, an unidentified guy made headlines by purchasing pizza using bitcoin (2). After its introduction, the market capitalization had risen to more than $12 billion when Mt. Gox was hacked and declared bankrupt in 2014 (3), which triggered the first bear market in the cryptocurrency market.

The market made an even stronger recovery, resulting in a rise to a total valuation of almost $3 trillion. As a result of the failure of Terra Labs' ecosystem, valued at $50 billion, it dropped once more this year (4).

Today, additional questions have been raised in response to the inability of Sam Bankman-Fried (SBF) to demonstrate leadership and adhere to fundamental principles of good financial conduct. Naturally, the value of the cryptocurrency market has followed suit, plunging to a market worth less than one trillion dollars.

Each of these cycles of prosperity followed by financial collapse has resulted in increased scrutiny from governmental leaders and requests for stricter regulation. Nevertheless, the recent disclosure of the proposed amendment to the federal regulation ought to inspire more uncertainty than confidence.

It would appear that politicians and those in charge of regulating the financial sector have extended invitations to the chief executive officers of well-established corporations like SBF and FTX, requesting their input on the regulations that should be implemented.

It makes perfect sense to regulate certain aspects of cryptocurrency to safeguard investors, particularly in speculative sectors. However, the legislation itself should be such that it encourages innovation and competition.

Neither the government nor the industry should give CEOs trying to shield their own companies the ability to set the standards for the sector.

This has happened before too! During the late 1990s and early 2000s, Microsoft used its wealth and political power to eliminate competitors and sidestep authorities.

Where will Crypto go From Here?

To begin, investors need to remember that fraudulent activities, breaches of security, and ineffective corporate leadership are not unique to the cryptocurrency industry; rather, they are the product of human ingenuity.

Second, rules alone will not prevent fraud because it is already unlawful; instead, they will only make it more difficult to commit fraud. When people who aren't familiar with a sector or a technology are the ones who create regulations, the risks they pose to the economy are exponentially increased.

Lastly, market downturns are uncomfortable, but they do nothing to undermine the fundamental rationale behind the existence of bitcoin in the first place, which is that the existing monetary system is flawed. It is not democratic, it is slow, it is expensive, and it is replete with selfish, unethical intermediaries.

The Answer is Decentralization

Custodial enterprises like FTX, Celsius, and Voyager were doomed to fail since they effectively recycled the obsolete business model of traditional large banks under the pretense of the cryptocurrency industry.

The same issues that plagued the traditional banking system when it first began are now rearing their ugly heads again.

As a result, the solution is not the death of cryptocurrency but rather a new investment into technology that returns to the purpose of why cryptocurrency exists, which is decentralized finance (DeFi).

Advantages Offered by DeFi

Many of the issues that currently affect the industry might be remedied by implementing DeFi. Instead of putting faith in the ability of business executives to operate in a manner that is moral, open, and accountable for their actions, DeFi does away with them entirely.

The blockchain, which is open and transparent and cannot be changed, is inserted in its place by DeFi.

Direct and immediate peer-to-peer transactions are made possible by DeFi, which eliminates the need to cede control of one's financial resources to a third party, assuming that such resources even exist.

The users are in charge of the procedure, which involves lending money and receiving cash in direct exchange; they do not pay third parties to retain their money.

Although Terra from Terraform Labs appeared to be a decentralized product, the company behind it was operating a pyramid scheme under the guise of a decentralized blockchain.

As with FTX's CEO, the CEO of Terra Labs, Do Kwon, successfully secured money from significant and well-known venture capitalists even though these investors did not conduct any checks on the company or its products.

If they had, they would have understood that the Luna system was riddled with the same flaws responsible for the failure of conventional financial systems on countless occasions in the past.

The failure of Terra was not a reflection of DeFi's performance. It was a failure by so-called experts who ought to have been more knowledgeable.

The Censors of Crypto

Coinbase, Galaxy, and 3AC, along with several other companies, had invested millions of dollars in Luna and advertised it to the cryptocurrency audience. Do Kwon increased the amount of money invested in his pyramid scheme by stamping the logos of these major corporations on his promotional materials.

The cryptocurrency community as a whole, and notably venture capital firms that play the role of censors, need to raise the bar for the enterprises it supports.

Some people believe that completely decentralized financial systems could bring about the collapse, contagion, and disintegration of the global market. But the most significant argument against DeFi is much more straightforward. It's not easy to use! And this might lead to the proliferation of con artists.

The program is difficult to navigate. The interfaces are difficult to understand. Even people who are really into technology are lost. It is not yet ready for widespread consumption.

However, the wallets that utilize DeFi technology will, with the right kind of investment and development, be able to reduce the likelihood of users making frequent mistakes and direct them away from fraud.

dApps will be infinitely more secure and safer than their centralized counterparts once they have undergone continual stress testing performed by certified security specialists.

The government will likely propose regulations and procedures that will try to choose winners and losers, eliminating aspects of what makes cryptocurrency such a fantastic innovation.

But none of this will deter cryptocurrency community members from continuing their search for alternative funding sources outside the conventional banking system.

Crypto isn't going extinct; rather, it's developing and maturing. We merely require a straightforward, risk-free, and dependable DeFi platform on which to stand.