Cryptocurrencies

The Post-FTX Future of Financial Governance

By Tony Tang, CEO of Ink Finance

Crypto CeFi, the Original Sin

The spectacular and scandalous collapse of FTX showed the colossal damage that a centrally organized, opaquely disclosed and recklessly managed financial platform can do to the entire industry and society at large. That centralized organizations can dominate the assets originating from decentralized networks is a sad irony, a disease that has plagued crypto since the beginning of cryptocurrency trading.

The narrative of the “crypto natives” is that blockchain technology was supposed to replace centralized entities like the Federal Reserve or other monetary authorities. In reality, cryptocurrency has handed itself to the shady and sketchy organizations that primarily use them to loot and raid. The irony is so sharp that it hurts. It has never been more evident than now that decentralized, transparent, rigorous and professional management of Web3 finance must take center stage. Now isn’t just a watershed moment; it is an existential one.

The infrastructures needed to enable and sustain a crypto-powered Web3 go far beyond the DeFi in its current form. Facilities in this category are merely independent functional units - though much better units than their counterparts in centralized systems. What we regard as an absolute necessity is the operational and control layer on top of these great functional units, capable of enforcing responsibility and accountability imposed upon the operators of these units while demonstrating their competence and credibility. These operators should ideally be elected and monitored by the communities they serve (organized as DAOs) and are regulatory compliant to perform their professional duties, if necessary.

Throughout 2021 and the better part of 2022, before the fallout of FTX, the number of DAO participants has already grown from 13,000 to a whopping 1.7 million people worldwide. The records speak for themselves; decentralization is the heart and soul of Web3. The damages done by the likes of FTX, 3AC, Celsius, etc., will only serve to show the advantage of Decentralized Autonomous Organizations (DAOs), as they are built on blockchains and promise transparent and democratic governance. Yet such lofty promises will disappoint if the operations of the DAOs are built on leaky or shaky foundations, particularly regarding their finance.

Integrated Financial Management in a DAO 

Most DAOs today are built hastily with incoherent and fragmented management components that have resulted in plutocratic governance schemes, Sybil-infested incentive structures and the proliferation of useless “utility tokens” (as fundraising vehicles). While these integrity and economic issues are already threatening the viability of DAO as an important augment to the traditional corporate framework, the lack of professional fiscal and finance tooling makes the matter even worse.

To be clear, there have been numerous DAO treasury tools in the market and more will be coming. Most of them are multi-sign wallets in one form or another. However, participants in the Web3 financial management sector need to urgently understand that the robustness of individual parts of a machine is different from a truly well-designed and well-run machine. How these parts are put together is entirely a different endeavor of its own merit. In fact, a multi-sig wallet can be regarded similarly to a DeFi lending protocol or a DEX as an independent functional part (we can’t emphasize enough that they all are MUCH better than their counterparts in the centrally managed regime). Yet, what makes up a financial governance framework is the processes and procedures governing the usage of these parts, which must also be built on-chain to be verifiable and enforceable.

A quick review of the evolution of the Web1 economy to the Web2 economy may shed light on our vision of the DAO financial management in the Web3 era. There were once numerous companies of various sizes that were all building their own online business systems. There were abundant independent solutions available to them (front-end browser tools, back-end server tools, middleware, payment, etc.) However, what made Web2 an ultimate success wasn’t simply because of the abundance or individual qualities of these solutions; it was, instead, the emergence of cloud service and SaaS. Specialized, customizable, integrated and off-the-shelf software suites capable of providing end-to-end solutions for a specific domain of business have won the day.

What Financial DAOs Look Like in the Future

While progress in recognizing DAOs as legal entities is underway in places such as Wyoming and the Marshal Islands, or that the Colorado co-op scheme is being revised to embody DAOs, the underlying technical infrastructures that carry them must be built to address at least the following three critical aspects of on-chain finance:

1. This is the most obvious and the easiest to understand: open-source DeFi protocols that carry out financial transactions such as spot trading, derivatives, lending, cross-chain asset swaps, and payment solutions. These facilities have never been short of innovation since DeFi took root in 2019 and will undoubtedly attract more talents and investments after the fallout of FTX;

2. The operational and control layer on top of the above-mentioned DeFi facilities. It is often misunderstood why much more is needed to mitigate financial risks than just the aforementioned facilities by themselves. 

Let’s use Aave and Uniswap, the two prominent DeFi protocols, as examples. If an asset manager spends $1M to acquire a given token from Uniswap and then pledges it on Aave to get a $700k loan, then uses the proceeds to acquire more of the same token from Uniswap, and then pledges it again on Aave, and repeats the process indefinitely, neither Aave nor Uniswap can stop his egregious leveraging. The guardrail curbing this asset manager’s action is the key, which leads to the inevitable process of rulemaking and enforcement - the process of financial governance, itself being a part of a more general governance framework.

What makes this process challenging is that the finance domain is widespread, requiring profound financial knowledge and the proper engineering that delivers rigor and flexibility. This is the sector in which we expect to see more competition as its critical importance becomes more evident to institutions and large ecosystems. We regard this sector as the financial SaaS of Web3.

3. Last but not least, the integration with global regulations. The FTX debacle has shown the harm of regulatory arbitrage. Suppose the advanced leading countries do not provide regulatory clarity; it only disincentives legit operators and encourages the shady organizations to base themselves in jurisdictions with poor or loose regulations. Yet the nature of cryptocurrencies assures that the harm will be felt globally.

Encouragingly, various decentralized protocols have made significant inroads in this domain, paving the way for on-chain organizations to be regulatory compliant if they choose to.

To sum up, the financial DAOs of the future will need to use open-source DeFi facilities as their transactional backbone, manage their fiscal and financial process with a transparent and on-chain executable financial control framework, and make themselves regulatory compliant when required. 

Conclusion

The ingredients to the long-term legitimacy of on-chain finance are specialized products that users can customizable, ready for end-to-end deployment, encompassing professionalism, security, transparency and adaptivity to regulatory oversight.

Only when the crypto industry can deliver such sound financial management solutions will it then be able to persuade and incentivize traditional institutions to shake off the carnage brought by the centralized agents operating under the banner of crypto. Only then can institutions such as auction houses, VC & angel investors, alternative asset managers and Web2 metaverse companies adopt DAO to augment their corporate structures to achieve higher efficiency in their businesses, which is the promise of the Web3 world.

While we might be facing a prolonged crypto winter, we at Ink Finance are ready to persevere and work with other determined builders to accelerate the adoption of truly decentralized finance.

About the author:

Tony Tang

Tony Tang is the CEO of Ink Finance, a multi-chain financial governance toolset for on-chain organizations to manage all aspects of their fiscal and financing activities. Tony is a Wall Street veteran with an engineering background who previously served as managing directors at several top financial institutions and founded a fintech VC.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.