It seems like, almost every other day, there’s another story of a collapse in the cryptocurrency ecosystem. The latest example is FTX but 2022 alone has seen similar stories come from entities such as Celsius and Voyager Digital.
The key element of all these stories is that centralized companies control user funds and that this approach runs against the philosophy of crypto itself. These events paint a picture and help to sell the argument that decentralized finance (DeFi), with a proper legal framework, is the answer.
This is the foundation on which all financial services should operate in future. Not only will our trust in decentralized blockchain technology protect customers from the greed and deceit of bad actors operating in the space but will also help us all to realize the true vision of what crypto is.
The FTX Collapse Sends A Message
In the last week, the cryptocurrency world has stood in awe as the shocking events surrounding the FTX exchange have played out. Once again, the core leadership behind a major platform mishandled user funds and was intentionally deceitful. The full extent of what happened and what will happen may not be known for some time, but what is more immediately apparent is the fact that this event showcases the inherent failings of centralized systems.
To be clear, while this event revolved around crypto assets, the FTX exchange was run as a purely centralized entity. User’s trusted their money to a company, and unfortunately, they were harmed as a result. Furthermore, the fallout from this event is already spreading to other centralized services. In the days following the collapse, prominent names like BlockFi are announcing hardships and even the possibility of having to declare bankruptcy themselves.
The fact is, these issues all stem from the very thing that Bitcoin was originally created to address: centralization. Centralized financial entities are highly susceptible to corruption. There’s a reason that Satoshi Nakamoto encoded the genesis block of Bitcoin with the headline “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Crypto was created with the intention of using decentralization to eliminate the ability for centralized entities to control the entire financial world. The idea was to give power back to individuals.
The events at FTX were not in line with that ideal and look what has happened as a result. Other major players, themselves built as centralized businesses, are also feeling the liquidity crunch. Meanwhile, decentralized solutions have endured no such crisis, as every token locked into DeFi is accounted for by code. Already, decentralized exchanges (DEXes) have seen an influx of new users in the wake of this crisis, and it’s likely this trend will continue.
By eliminating the human element, DEXes directly fix the problems surrounding corruption in the financial system. While regulation may be coming in the future, the rules of a decentralized system simply cannot be broken in the first place. This is the essence of what cryptocurrencies are designed for. Users have complete control and transparency surrounding their funds, and math determines how their assets are handled.
Regulation Still Needs To Be Developed
That isn’t to say the story of DeFi is done. The one key element that is missing is regulation.
All of the benefits that DeFi can bring need a legislative framework that both protects consumers and provides institutions with legal clarity in their operations. What is essential is that these new regulations give clear parameters for how to engage with decentralized assets, while not stifling the industry as a whole. Cryptocurrencies cannot be treated like contraband but they don't need to be the “Wild West” either.
If realistic and supportive rules are put into place, then the DeFi world can expand and integrate with traditional finance in ways that make both fields operate more transparently and efficiently. We can put an end to unsavory banking practices in crypto economies, as well as fiat ones. True accountability can be enforced on a protocol level. One day, we may even live in a time where financial corruption becomes a thing of the past because unbreakable code enforces ethical behavior.
The bottom line is that the FTX debacle is a clear message that centralized financial services have failed us. The fact that it traded crypto is irrelevant, as it wasn’t operated in the spirit of the enterprise. Decentralized services do however offer a true realization of the vision that blockchain always offered. DeFi is the future, and the sooner the financial world catches up to this fact, the sooner we can put these types of events behind us.
About the Author:
Sasha Ivanov - Dubai-based founder of Waves Platform, a public blockchain launched in 2016. Born in Ukraine, Sasha studied physics at Moscow State University.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.