The rapid implosion of FTX has led general investors and crypto believers alike to question the validity of crypto and, indeed, predict its end. But, an understanding of history points not to crypto’s demise but rather a move toward new technology and growth.
Financial markets move, as Willie Nelson once said, in phases and stages, circles and cycles. Companies develop ideas, grow quickly, ignite unwarranted investor euphoria and then implode — only to seed the ground for the next company, the next idea and the next growth phase.
Crypto is no different.
In 2010, an unknown person famously used Bitcoin (BTC) to buy pizza. After its initial launch, market capitalization grew to more than $12 billion when Mt. Gox’s 2014 hack and bankruptcy precipitated crypto’s first bear market. The market rebounded even more strongly, rising to a total valuation of around $3 trillion. It fell again this year in the wake of the collapse of Terraform Labs’ $50 billion ecosystem.
Today, FTX’s collapse and Sam Bankman-Fried’s (SBF) failure of leadership and basic sound financial practices have raised new doubts. Naturally, the crypto market has fallen in kind, plummeting to less than $1 trillion in market cap.
Each of these boom-bust cycles has led to more eyes from government leaders and calls for more regulation. But, the recent leak of the proposed Federal regulation should raise more questions than confidence. Financial regulators and politicians have apparently invited CEOs of established companies, including SBF and FTX, to provide advice on what those regulations should be.
That alone should terrify investors.
Look, it makes sense to regulate parts of crypto to protect investors — especially in speculative areas — but the regulation must be designed to drive innovation and competition. Neither the government nor the industry should allow CEOs looking to protect their own businesses to determine rules.
We have seen this bad movie before: In the late 1990s and early 2000s, Microsoft leveraged its wealth and political power to destroy competitors and skirt regulators.
So, where does crypto go from here? First, it is critical that investors remember that scams, security hacks and failed corporate leadership are not restricted to crypto; they are human creations. See entries for Enron, Gould and Fisk and the 2013 Yahoo privacy breach.
Second, regulations alone will not eliminate fraud (it’s already illegal); they will merely make fraud more complicated. Regulations become even more dangerous when they arise from individuals who do not understand the industry or technology.
Finally, market downturns are painful, but they do nothing to undermine the very reason cryptocurrency exists in the first place: the traditional financial system is broken. It is expensive, filled with greedy, unethical middlemen, slow and undemocratic.
Custodial companies such as FTX — and Celsius and Voyager before it — failed because they essentially repurposed the outdated big bank model under the guise of crypto. Unsurprisingly, the same problems faced during the origin of the traditional banking system — including shady business practices, bank runs, uninsured accounts and pump-and-dump scams — are now popping up.
Therefore, the answer is not the end of crypto but a new investment into technology that returns to crypto’s reason for being: decentralized finance (DeFi).
DeFi would solve many of the problems that plague the industry. Instead of trusting corporate leaders to be ethical, transparent and accountable for their practices (see the glowing profiles of SBF), DeFi eliminates them altogether. In their place, DeFi inserts the blockchain — open, transparent and immutable.
Total monthly visits to DeFi platforms by region, July 2019-January 2021. Source: Chainalysis
Instead of handing control over your money to third parties — if it’s even there — DeFi enables direct, immediate peer-to-peer transactions.
Instead of paying others to hold their money, users themselves control the process — loaning money and receiving payments directly.
While it’s true that Terraform Labs’ Terra (LUNA2) seemed like a decentralized product, the reality was that it was a pyramid scheme masquerading as a decentralized blockchain. Just like SBF, Terraform Labs CEO Do Kwon was able to secure funding from large and well-known venture capitalists who did zero due diligence on the company or its products. If they had, they would have realized the Luna system contained the same pitfalls that have led to multiple traditional finance crashes in the past.
Terraform’s collapse wasn’t a failure of DeFi. It was a failure of so-called experts who should have known better. Coinbase, Galaxy, 3AC, and several others had 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 acquire more investments in his pyramid scheme.
The crypto community, and especially venture capital firms that act as gatekeepers, must demand more from its companies.
Some claim that truly decentralized finance could lead to global market disintegration, contagion and collapse. But the strongest pushback to DeFi is much simpler: it’s a nightmare to use, which can breed scammers. The software is clunky. Interfaces are complicated. Even tech enthusiasts are confused. It’s not ready for the masses.
But that’s exactly the opportunity.
With the proper investment and development, DeFi wallets will help limit common errors and guide users away from scams. Decentralized apps, under constant stress tests from professional security experts, will be infinitely more secure and safer than their centralized analogs.
The government is likely to propose regulations and measures that will attempt to pick winners and losers, destroying parts of what makes crypto great.
But none of this will stop the crypto community from continuing to look for financial options outside the traditional financial sector. Crypto is growing and maturing, not dying. We just need a simple, safe and robust DeFi platform on which to stand.
Giorgi Khazaradze is the CEO and co-founder of Aurox, a leading DeFi software development company. He graduated from Texas Tech with a degree in computer science.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.