The rapid crash of FTX has caused ordinary investors and cryptocurrency advocates to question the credibility of the cryptocurrency and even predict its end. But understanding history does not point to the demise of cryptography, but rather to a move towards new technologies and growth.
Financial markets move, as Willie Nelson once said, in phases and stages, circles and cycles. Companies develop ideas, grow rapidly, fuel unwarranted investor euphoria, and then explode—only to sow the ground for the next company, the next idea, and the next phase of growth.
Cryptocurrency is no different.
In 2010, an unknown person used Bitcoin (BTC) to buy pizza. After its initial launch, the market capitalization rose to over $12 billion when the 2014 Mt.Gox hack and bankruptcy accelerated the cryptocurrency’s first bear market. The market recovered even stronger, rising to a total valuation of around $3 trillion. It fell again this year after the collapse of the $50 billion Terraform Labs ecosystem.
Today, the collapse of FTX and the failure of Sam Bankman-Fried (SBF) with leadership qualities and basic sound financial practices have raised new doubts. Naturally, the cryptocurrency market fell in kind, dropping to less than $1 trillion in market capitalization.
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Each of these boom-and-bust cycles attracted more attention from government leaders and called for increased regulation. But the recent leak of a proposed federal regulation should raise more questions than certainties. Financial regulators and politicians have apparently invited the heads of established companies, including SBF and FTX, to give advice on what these rules should be.
This alone should scare investors.
Look, it makes sense to regulate some of the crypto to protect investors, especially in speculative areas, but regulation should be designed to encourage innovation and competition. Neither the government nor the industry should let CEOs who want to protect their business make the rules.
We’ve seen this bad movie before: in the late 1990s and early 2000s, Microsoft used its wealth and political power to destroy competitors and bypass regulators.
So where does the crypto go? First, it is very important that investors remember that scams, security breaches, and failed corporate leadership are not limited to crypto; they are human creations. See entries about Enron, Gould and Fisk and Yahoo’s 2013 privacy breach.
Secondly, regulation alone will not get rid of fraud (it is already illegal); they just make it harder to scam. Rules become even more dangerous when they come from people who do not understand the industry or technology.
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Finally, market downturns are painful, but they do not undermine the very reason for the existence of cryptocurrencies: the traditional financial system is broken. It’s expensive, filled with greedy, unethical middlemen, slow and undemocratic.
Custody companies like FTX, and before it Celsius and Voyager, have failed because they have essentially repurposed an outdated big bank model under the guise of a cryptocurrency. Not surprisingly, the same problems that were faced at the birth of the traditional banking system are now emerging, including shady business practices, bank withdrawals, uninsured accounts, and pump-and-dump fraud.
So the answer lies not in the end of crypto, but in new technology investments that go back to the reason crypto exists: decentralized finance (DeFi).
DeFi will solve many of the problems the industry is facing. Instead of trusting corporate leaders with ethics, transparency, and accountability for their activities (see SBF’s glowing profiles), DeFi eliminates them entirely. In their place, DeFi inserts blockchain – open, transparent and immutable.
Total monthly visits to DeFi platforms by region, July 2019 – January 2021 Source: Chainalysis.
Instead of handing over control of your money to third parties – if there are any at all – DeFi allows for direct and immediate peer-to-peer transactions.
Instead of paying others to hold their money, users control the process by lending money and receiving payments directly.
While Terraform Labs Terra (LUNA2) did appear to be a decentralized product, it was in fact a Ponzi scheme masquerading as a decentralized blockchain. As with SBF, Terraform Labs CEO Do Kwon was able to secure funding from large and well-known venture capitalists who did not conduct due diligence on the company or its products. If they had known, they would have realized that the Luna system has the same pitfalls that have led to many traditional financial failures in the past.
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The collapse of Terraform was not a failure of DeFi. It was the failure of the so-called experts who should have known better. Coinbase, Galaxy, 3AC and a few others have invested millions of dollars in Luna and promoted it to the crypto audience. By stamping the logos of these large companies, Do Kwon was able to attract more investment into his pyramid scheme.
The crypto community, and especially venture capital firms acting as gatekeepers, should demand more from their companies.
Some argue that truly decentralized finance could lead to disintegration, contagion, and the collapse of the global marketplace. But DeFi’s strongest push back is far simpler: it’s a nightmare to use and can spawn scammers. The software is clumsy. Interfaces are complex. Even tech enthusiasts are confused. He’s not ready for the masses.
But this is exactly the opportunity.
If properly invested and developed, DeFi wallets can help limit common mistakes and keep users safe from fraud. Decentralized applications subjected to constant stress testing by professional security experts will be much more secure and reliable than their centralized counterparts.
The government will likely come up with rules and measures that will try to pick winners and losers, destroying some of what makes cryptocurrencies great.
But none of this will stop the crypto community from further looking for financial opportunities outside of the traditional financial sector. Cryptocurrency grows and matures, not dies. We just need a simple, secure and reliable DeFi platform to stand on.
Giorgi Khazaradze is the CEO and co-founder of Aurox, a leading DeFi software development company. He graduated from Texas Institute of Technology with a degree in computer science.
This article is for general informational purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are those of the author only and do not necessarily reflect or represent the views and opinions of .