This piece is written in a satirical way in an effort to describe how friends and family might be talking to you now about the FTX situation and crypto more broadly. It is meant to be shared among those people in an effort to help them understand why FTX is not crypto and why our work is more important than ever given the fallout and failings of SBF and co.
Dear family, I hope this finds you well. First of all, I am safe. A little battered and bruised but we fight on. I am one of the lucky ones for I largely managed to avoid (at least directly) the fall-out from FTX. Others were not so lucky so we must do our best to support all of those in our industry at this time.
I know your friends have been asking for a simple explanation of what happened. Many have written about the situation and rather than be the 500th person to explain it, I thought I’d point you to this excellent thread here from Jason Choi about this week’s events. Instead, I thought I would spend my time sharing a simple note of why FTX is not crypto and how this and other high profile events in 2022 are not possible in the fully public on-chain world we are trying to champion.
I promised not to explain the FTX situation but we need to set some definitions and context. FTX was a centralised exchange (CEX). Binance, Coinbase and other well known exchanges also fit into this category. They are simply a marketplace that allow you to buy/sell assets. In this case crypto assets, however the asset is not important and FTX could have allowed you to buy and sell bananas for all intents and purposes. The world I champion and bore you about every time we speak is the decentralised world. This is TRUE crypto. Applications built on public blockchains such as Ethereum that are open source and where every transaction is verifiable on-chain and can be seen and validated by anyone through a block explorer such as Etherscan. We use the term ‘DeFi’ to describe financial applications built on top of public blockchains. The DeFi equivalents of centralised exchanges are called decentralised exchanges (DEXs). Examples include Uniswap, SushiSwap, CoW Swap and others. We seem to like food and animals in crypto but that’s a story for another time.
CEX: FTX, Binance, Coinbase (built on traditional financial rails)
DEX: Uniswap, SushiSwap, CoW Swap (built on top of public blockchains such as Ethereum)
At its core, DeFi is building a parallel and improved financial system on top of public blockchains. This Messari article explains it succinctly:
Today, the financial system (composed of banks, financial institutions, etc) mostly consists of centralized database systems littered with rent-seeking middlemen, high fees, and hold-ups. With DeFi, closed financial systems can be transformed into an open financial economy based on open-source protocols that are more accessible, with fewer intermediaries, and more transparent. Since these new financial protocols utilize smart contracts, they are both programmable and interoperable (are built with similar technical standards that enable them to easily communicate with each other).
FTX vs DeFi
Three huge differences can be cited here to help explain how this saga could NOT have happened in DeFi.
#1 — Customer deposits
While many of the facts are still surfacing in the FTX drama, it is widely understood they were using $10bn of customer funds to allow their sister hedge fund Alameda Research (also started by SBF the founder of FTX) to undertake risky trading strategies. This is outright fraud. This simply would not have been possible in DeFi. For one, DeFi applications do not hold customer deposits full stop. DeFi and crypto is fully custodial. This means that you and only you have access to your funds as you control the private key to your account. Dex’s such as Uniswap CANNOT do anything with your funds. It is written in the smart contract code. This code is open source meaning anyone in the world can see it and scrutinise it. This is not the case for centralised businesses and exchanges such as FTX.
#2 — Asset transparency
It is estimated that Alameda has 56 wallet addresses with which they use to trade and store their tokens. The beauty of the blockchain is we can quickly search these wallet addresses to understand the exact amount of tokens that Alameda owns and therefore the subsequent impact if they were to sell them into the market. See the below from Lookonchain.
#3 — On-chain vs off-chain borrowing
While it is unclear exactly the amount of bad debts FTX and/or Alameda has in the ‘real’ world (estimated to be over 1 million creditors) we can quickly identify their exact payment obligations on-chain. Here is good summary of their on-chain liabilities. In an extension of the transparency benefits of #2, a search of all their addresses through a wallet aggregation platform such as Zapper would uncover all this information. The current off-chain situation is a black box.
During the FTX saga and the subsequent market movements, DeFi worked exactly as designed. Below you can see that Alameda had staked $49.6m of the FTX token ‘FTT’ as collateral in the DeFi lending platform abracadabra.money. When the value of the FTT fell below the required collateral requirements, the loan was liquidated and paid off.
The important part is highlighted in this excellent thread from Re7 Capital that demonstrates how despite the chaos, DeFi platforms continued to process transactions and liquidations. No down time.
Robert Leshner is the founder of Compound protocol, a money market DeFi protocol built on top of Ethereum where users can lend and borrow assets. His Tweet highlights how the the open transparent DeFi protocols governed by code are far superior to the black box approaches inherent in current financial infrastructure.
Buying a house
Bear with me as I try to explain this using the real estate market. Imagine you are in the market for a new home and you have two viewings lined up. One house you are able to go inside, you can touch and feel everything and importantly you are able to have experts come in and also confirm this fact. Let’s say even you have thousands of professionals looking at this house everyday and verfying the gas does indeed work and there’s no mould etc.. I mean you would feel pretty confident that the house is pretty much a secure buy right? What about the second house, let’s say you can only look at the house from the outside and gain a small peak through some of the windows but apart from that you have to trust the agent and home seller that everything is as advertised. And we all know better than to trust a real estate agent (sorry to you folk reading this). Which house would you feel more comfortable buying and living in? Number one all day of course! that’s the difference between DeFi and open source blockchain applications vs centralised applications. Did that make sense?
Where does this all leave us?
Exhausted for one. Angry as well. But more importantly, despite it being hard to be positive right now it only further reaffirms what we have been fighting for and advocating this whole time. While the media paints crypto as a shadow economy used to finance crime and the like, true crypto i.e. the open protocols described above are the polar opposite. They are open books, readable and accessible to all in which examples such as FTX simply are not possible. So we must dust ourselves off, purge bad actors from the space and importantly work with and educate the right people to continue to build a better, fairer financial ecosystem for all.
