CeFi failings provide a helpful advert for DeFi
In recent days and weeks, several people who are familiar with my career have reached out with the same question: “Is this FTX thing causing you trouble?”
A few of those people barely even know what crypto is.
That’s a sign the collapse of FTX at the hands of Sam Bankman-Fried, and the potential contagion effect across the broader crypto ecosystem, has earned an audience beyond the frontiers of our industry and community. It also shows that the latest crypto winter, 2022 edition, continues to rattle on — and perhaps even worsen.
There’s something more important than prices at stake.
Our primary concern should be that the downfall of centralized financial (CeFi) institutions like FTX, and Celsius before that, doesn’t cause lasting damage to the broader crypto economy, potentially dragging down progressive, meaningful decentralized finance (DeFi) with it. Our battle for projects in the DeFi space is to ensure the baby (DeFi) doesn’t get thrown out with the bathwater (CeFi) when it comes to reputation, trust, investment and potential (over) regulation by authorities who are understandably spooked by market volatility, fraud and loss.
The events that have thus far resulted in bankruptcy at FTX and caused painful ripple effects across the crypto ecosystem. The U.S. Justice Department and SEC are looking into allegations that FTX illegally sunk billions of dollars of customer funds into Alameda Research, a trading firm also created by SBF. This story still has legs.
Ultimately, this series of events thus far illustrates why the path toward sustainable, reliable, trustworthy crypto finance will more likely emerge and solidify in DeFi, and its tenets: trustlessness, self custodianship of crypto assets, transparency, optimistic mechanisms and indeed, decentralized governance.
DeFi is part of the solution, but it’s important for law-makers to understand that. People are already building DeFi projects based on this behavior and these values. Let’s hope it continues.
There are a few promising signs.
Not your keys, not your coins
One of the main allegations against FTX is that token assets the exchange was holding on behalf of customers as a centralized exchange were being redirected and used without permission in dishonest ways. Specifically to prop up Alameda.
One of the mantras of DeFi continues to ring true. If you don’t have custodianship over your own crypto assets, then they’re not really yours.
Ledger, the hardware crypto wallet, told TechCrunch on Nov. 14 that it had experienced its largest sales period ever on the heels of the FTX collapse, according to this Tweet by TechCrunch crypto reporter Jacquelyn Melinek.
This would suggest a rising appetite among users for decentralized token exchanges and self custodianship of tokens in hard wallets as people lose faith in CeFi exchanges.
The buidlers keep on buidling
One of the most important ways that our teams at UMA and Across interact with the industry is through hackathons.
Events such as Graph Hack and ETHGlobal’s annual series are multi-day conferences and hackathons in which teams of builders earn prizes by building on various protocols and finding creative ways to integrate with projects like UMA using existing code and smart contracts. Hackathons are the beehives of DeFi and Web3.
As the crypto winter has intensified, the energy at these events has actually grown stronger. There’s a saying: “don’t waste a bear market” and it feels like hackers and builders in Web3 are deeply focused on producing the ‘plumbing’ and scaling tools that will feed the next bull run.
For UMA, the number of hackers building on our protocols has grown in each event in 2022 while the quality and sophistication of the hack teams has improved.
Of the 284 hacker projects at ETHSF in November, 38% were by teams or individuals that were new to the Web3 space. That shows promising potential, and fresh brain power.
CeFi abuse stokes appetite for decentralization
Achieving true decentralization and effective, functional DAOs remains a work in progress.
Cryptoeconomics is part of the solution, but can still lead to a concentration of ownership within protocols and communities. This can tamp down decentralization mechanisms that rely on governance tokens.
The situation with FTX is another challenge to crypto’s reputation and a major drag on prices, whether you’re focused on Bitcoin, Ethereum or the broader alt-coin ecosystem.
When the price of ETH sinks, it takes steam out of our entire ecosystem and challenges treasuries (especially the ones that lack diversity or are improperly managed).
But the big picture is that the FTX disaster and previous CeFi failings provide a free advertisement for DeFi. It’s proof that decentralized finance is on the right track.
Evan Duggan is a former news and business journalist, who is the PR and Communications Lead at UMA. Follow Evan Duggan and UMA Project on Twitter.
