FTX Was Not Crypto
Or, Why Decentralization Matters
👋 Welcome to the 37th issue of The Syllabus from Invisible College — a weekly(ish) newsletter that helps you navigate the fast-moving world of web3. To get this newsletter delivered to your inbox, subscribe here:
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Now onto this week’s post…
I don’t log onto Facebook all that often anymore. These days, Twitter is my typical go-to social media vice. But last week I was sick and found myself mindlessly poking around on my phone more than I’d like to admit.
When I opened the Facebook app, I saw a post from a friend I go way back with—a friend who has worked in tech for decades. Here’s what he wrote:
Why didn’t I “invest” money in crypto? Pretty much what happened to FTX is why. I just don’t trust it. No regulations. No standards. No oversight.
There were a couple of comments in agreement. I nearly ignored it and moved on, but instead, I took the opportunity to explain why FTX was not the same as crypto.
Below is a much longer and more detailed version of what I wrote.
FTX was not crypto.
Sure, they dealt with crypto assets. But that’s about the extent of their connection to the core tenets of crypto. Tenets such as decentralization, transparency, and trustlessness.
Instead, FTX was a centralized entity (actually 130+ entities, according to their bankruptcy filing). If you had funds on FTX, you didn’t own them. FTX did. And they chose to use your funds to make wild, speculative gambles.
As Rockwell put it in a recent Invisible College event:
FTX was Jane Street traders coming to crypto, creating unregulated banks and recreating the 2008 financial crisis.
In other words, FTX was a traditional company that happened to touch crypto as part of their course of business. In addition, they dipped into customer funds, and even used their own $FTT token, to covertly cover up losses incurred earlier this year during the Terra/LUNA collapse by their sister company, Alameda Research.
And now, because of their wildly speculative and almost certainly illegal actions, not only have billions of dollars of value essentially vanished, leaving their users with next to nothing, but they’ve also given crypto skeptics and regulators yet another reason to think crypto is all a scam.
The ironic thing is that this whole ordeal underscores exactly why crypto exists in the first place—being able to conduct financial transactions without the need for trusted third parties.
There’s a big difference between what Wall Street’s version of crypto is and actual crypto—Decentralized Finance (DeFi), in particular:
Throughout this whole debacle, all the truly decentralized protocols continued to operate perfectly. Meanwhile, most of the centralized actors building on pseudo-crypto rails are going down one by one.
FTX’s founder Sam Bankman-Fried (SBF) has gone on record in the past saying he doesn’t really care about the ethos behind crypto (links are difficult to find given the onslaught of recent news, but trust me, he has said words to that effect in the past). His recent debate with Erik Vorhees, a true crypto person and decentralization maxi, on the Bankless podcast, highlighted his shaky commitment to crypto values. The debate was an utter disaster for SBF.
Looking at it through a very generous lens, you could maybe have argued he was attempting to be pragmatic and appease regulators. But as more details emerged about his ties to SEC Chairman Gary Gensler, those arguments hold less and less water. What seems to actually have happened was that he tried to broker shady backroom deals in Washington using his parent’s political connections in order to carve out special treatment for FTX in upcoming regulatory legislation.
Voorhees, on the other hand, has been trying to spread the word about crypto values and how DeFi isn’t something regulators should be scared of embracing.
Before the FTX blowup, the narrative SBF pushed was that his wealth accumulation was all in service to a concept called effective altruism, a philanthropic ideology that seeks to apply evidence and reason to determine the most effective ways to benefit others. Which is to say, he presented himself as a benevolent billionaire who would give all his money away to actually meaningful charities or causes. Eventually, at least. Maybe. There’s hardly any evidence of him doing much in the way of charitable giving so far. And it seems unlikely that he will be able to do much in the future.
2022 has given us too many painful reminders of the importance of decentralization and the pitfalls of lionizing the founders of centralized crypto companies.
Surprise, surprise, I didn’t convince my friend. He still doesn’t trust crypto. And with the track record of bad actors in the crypto space this year, I don’t blame him.
I wasn’t really trying to convince him, though. I was, in part, trying to explain why I still believe in crypto. As counterintuitive as this might seem, despite all the insanity that has occurred in 2022, I’ve become even more convinced about the importance of crypto values.
Other Recommended Reads
The Casino and the Genie
Mario Gabriele from The Generalist addresses the FTX situation and ends with some words of wisdom for those who are still building in the crypto space
A comprehensive breakdown of the FTX fallout
jonwu.eth breaks down exactly what went down last week in this viral tweet thread
What the downfall of FTX means for Solana
Satoshi Stacker digs into how the Solana blockchain may or may not be affected by the FTX bankruptcy in this nuanced tweet thread
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