The crypto industry needs to pick itself up and refocus on the path that serves decentralized businesses and consumers in the real world.
Crypto investors keep learning the lesson of decentralization the hard way. FTX today. Celsius, BlockFi, and Voyager Digital yesterday. FTX’s meltdown is set to rank among the greatest corporate failures of all time, both for its scale and its speed. This situation has significantly damaged the crypto industry and broken trust in the developing world of blockchain. Thousands of investors have lost complete control over their crypto assets on the exchange—stranding billions of dollars that appear to have been taken by Sam Bankman-Fried to loan to his personal hedge fund Alameda Research. Reports vary, but it seems that up to $10B was sent out of FTX to Alameda Research.
WHY DOES THIS KEEP HAPPENING, AND WHO’S NEXT?
The above examples are all centralized financed (CeFi) businesses that used the principles of decentralized finance (DeFi) to build trust. Celsius said it was crypto-lending and looked like many other crypto-lending platforms—but it was a hedge fund making risky bets with people’s money. FTX was an exchange that loaned deposits to a hedge fund that was making risky bets. Three Arrows Capital was a CeFi hedge fund making risky bets off-chain. The list goes on and on.
CeFi businesses keep their assets and accounting off-chain. They serve as escrows for their clients and do not record transactions on the blockchain. This allows them to provide a great user experience and lower fees, but these off-chain operations raise the question of “who actually owns our crypto assets?” The private keys to your wallet are not in your possession when you store your cryptocurrency on centralized platforms; instead, they are held by the owners of those sites.
Unfortunately, some centralized exchanges have made off-chain bets with user funds. As history has repeatedly shown, the next step is to halt all user withdrawal activities and file for bankruptcy. Even well-capitalized exchanges, like Gemini, have locked some user funds because an underlying vendor called Genesis failed.
WHERE DO WE GO FROM HERE?
Crypto skeptics are having a field day after FTX’s collapse, but this meltdown may only mark the end of using unregulated exchanges, while crypto itself hasn’t changed one bit. DEXs can offer some solutions to these current issues plaguing the industry.
According to Cointelegraph, “DeFi has three distinguishing characteristics: transparency, control and accessibility.” In DeFi, users are able to review the governing rules of the system because it’s based on open-source technology. DeFi users can see the location and price of their assets at any time of day because they’re all tracked on a public blockchain. And most DeFi protocols don’t have any way to lock up funds or halt withdrawals—allowing participants to leave at any time. Furthermore, DeFi keeps agreements on-chain, which means they’re public and auditable by anyone at any time.
PROTECT YOURSELF AND YOUR CUSTOMERS
Let’s move on from FTX’s collapse and return to the fundamentals. The core tenets of digital assets aren’t just profit—it’s a system of decentralization, cutting out middlemen, and giving people self-sovereign control of their assets.
If you are a business working to bring blockchain, digital assets, or other Web3 initiatives to your customers, here are some solutions to consider:
1. Encourage a self-custody model. Self-custody systems keep assets in the hands of their owners—not third-party actors. For true believers like me, this isn’t just about improving the user experience for blockchain applications, it’s about actually fulfilling the promise set out in the Bitcoin whitepaper: giving the world a financial system created by the people, for the people, that gives each person control of their own assets and true visibility into what’s happening with their assets on the blockchain.
2. Manage your own assets. Decentralized protocols like Uniswap have been rock solid with billions of dollars in transactions every month. Your business should set up policies and procedures to manage your own keys and your own assets. One of the hardest parts about self-managing keys is corporate control over who gets to approve transactions—I’d recommend using a multi-signature (often called “multi-sig”) wallet. You can easily mirror most corporate oversight processes with a multi-sig approach that requires more than one employee to sign off on any transaction.
3. Spread your risk. If you are going to use centralized exchanges, lenders, or other parties that could potentially fail, consider splitting your assets across multiple partners. As FTX has proven, it’s very hard to predict who will fail, so do your due diligence, check the terms, and consider spreading your risk.
4. Have a clear exit from each partner. When you decide who you’re working with in Web3, make sure you’ve thought through possible off-ramps from the relationship and fully understand whether your company or your users can get their NFTs, cryptocurrencies, and other tokens out of the system. Ask your vendors to present a clear plan for migration out of their system before you commit to it.
I believe that many have learned their lesson this time and the future of digital assets is still bright. The crypto industry needs to pick itself up and refocus on the path that serves decentralized businesses and consumers in the real world.
About AIKON
Blockchain and crypto are technologically complex. AIKON makes it simple. We’ve built a suite of intuitive products built on the ORE Network ($ORE) for enterprise companies looking to provide a seamless user experience that works cross-chain with Ethereum, Polygon, Telos, Algorand, WAX, EOS and more.