FTX has shown interest in using DeFi platforms instead of gatekeepers

FTX has shown interest in using DeFi platforms instead of gatekeepers

The rapid implosion of FTX has led general investors and crypto believers to question the validity of the crypto and, indeed, to predict its demise. But, an understanding of history does not point to the demise of crypto, but rather to new technology and growth.

Financial markets evolve, as Willie Nelson once said, in phases and stages, in circles and cycles. Companies develop ideas, grow rapidly, spark unwarranted euphoria from investors, and then implode – only to sow the ground for the next company, the next idea, and the next phase of growth.

Crypto is no different.

In 2010, an unknown person used Bitcoin (BTC) to buy pizza. After its initial launch, the market capitalization reached over $12 billion when the Mt. Gox hack and bankruptcy in 2014 precipitated the first crypto bear market. The market rebounded even stronger, reaching a total valuation of around $3 trillion. It fell again this year following the collapse of Terraform Labs’ $50 billion ecosystem.

Today, the collapse of FTX and the failure of Sam Bankman-Fried (SBF) in leadership and sound basic financial practices has raised new doubts. Naturally, the crypto market fell in kind, dropping to less than $1 trillion in market capitalization.

Related: The SEC should target Do Kwon, but it is distracted by Kim Kardashian

Each of these boom and bust cycles has caught the attention of government leaders and called for more regulation. But, the recent leak of the proposed federal regulations 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.

Listen, it makes sense to regulate certain parts of crypto to protect investors – especially in speculative areas – but regulation should be designed to drive innovation and competition. Neither government nor industry should allow CEOs seeking to protect their own companies to set 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 circumvent regulators.

So where does crypto go from here? First, it is essential for investors to remember that scams, security hacks and failed corporate executives are not limited to crypto; they are human creations. See entries for Enron, Gould and Fisk and Yahoo’s 2013 privacy breach.

Second, regulation alone will not eliminate fraud (it is already illegal); they will only complicate the fraud. Regulations become even more dangerous when they come from people who don’t understand the industry or the technology.

Related: The FTX Fiasco Means Coming Consequences for Crypto in Washington

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’s expensive, filled with greedy, unethical, slow and undemocratic middlemen.

Custodian 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 found at the origin of the traditional banking system – including shady business practices, bank runs, uninsured accounts, and pump-and-dump scams – are now emerging.

Therefore, the answer is not the end of crypto but a new investment in technology that goes back to crypto’s raison d’être: decentralized finance (DeFi).

DeFi would solve many of the problems plaguing the industry. Instead of trusting business leaders to be ethical, transparent, and accountable in their practices (see SBF’s glowing profiles), DeFi is eliminating them altogether. In their place, DeFi inserts the blockchain – open, transparent and immutable.

Total number of 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 it’s even there – DeFi enables direct and immediate peer-to-peer transactions.

Instead of paying other people to hold their money, users control the process themselves, lending money and receiving payments directly.

While it is true that Terra (LUNA2) from Terraform Labs appeared to be a decentralized product, the reality was that it was a pyramid scheme masquerading as a decentralized blockchain. Much like SBF, Terraform Labs CEO Do Kwon was able to secure funding from large, well-known venture capitalists who did no due diligence on the company or its products. Had they done so, they would have realized that the Luna system contained the same pitfalls that led to several traditional financial crashes in the past.

Related: Will SBF face the consequences of FTX’s mismanagement? Don’t count on it

Terraform’s collapse was not a DeFi failure. 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 public. By stamping the logos of these big 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, need to demand more of their businesses.

Some argue that truly decentralized finance could lead to global market disintegration, contagion and collapse. But the strongest against DeFi is much simpler: it’s a nightmare to use, which can spawn scammers. The software is clumsy. The interfaces are complicated. Even tech enthusiasts are confused. It’s not ready for the masses.

But this is exactly the occasion.

With proper investment and development, DeFi wallets will help limit common mistakes and keep users away from scams. Decentralized applications, subjected to constant stress tests by professional security experts, will be infinitely more secure and safer than their centralized analogues.

The government is likely to come up with regulations and measures that will attempt to pick winners and losers, destroying some of what makes crypto great.

But none of this will stop the crypto community from continuing to search for financial options outside of the traditional financial sector. Crypto grows and matures, it does not die. We just need a simple, secure, and robust DeFi platform to stand on.

Giorgi Khazaradze is the CEO and co-founder of Aurox, a leading company in the development of DeFi software. He graduated from Texas Tech with a degree in computer science.

This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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