FTX Has Collapsed: Can Other Centralised Crypto Exchanges Bounce Back?

Cryptocurrencies, NFTs, and blockchain were once ardently promoted by enthusiasts insisting that these technologies were driven by an ideology of social change.But today, the crypto space is in turmoil as shares of trading platforms plummet and firm after firm initiates bankruptcy proceedings. While this is not the first storm that crypto investors have been forced to tide, this time may be different as one cannot simply 'HODL' (Hold On for Dear Life) their way out of it. At the centre of the latest crypto crash is FTX, a crypto exchange once valued at $40 billion dollars, and its founder Sam Bankman-Fried who is accused of misusing customer funds to support his trading business, Alameda Research.The collapse of FTX has led to investors calling for more transparency in the dealings of centralised exchanges with their funds. In this context, can decentralised exchanges prevent future crypto meltdowns? Are they the key to unlocking the true potential of cryptocurrency? The Quint spoke with crypto industry players to find out. Decentralised Finance Explained: Borrow, Lend Cryptocurrency Without BanksBullish VCs: "What happened during the last bull market was, even napkin ideas were getting funded left, right, and centre. Even if you just had a whitepaper, if you just had a deck, that was enough to get you funded," Mohit Madan, CEO and cofounder of decentralised farming application Unifarm, told The Quint. In fact, FTX's Bankman-Fried was so easily successful in convincing investors that he reportedly played a video game during a Zoom meeting with partners from Sequoia Capital. Misplaced trust: Speaking about how the FTX collapse exposes the crypto industry to systemic risk, Ashish Mehta, the cofounder of B2B crypto exchange DigitX said,"It proves that the propensity to leverage one's unique position to betray the trust of many is inherent to human nature and hence, trust has to be institutionalised. It shows society's immaturity to respect and implement decentralised systems adequately. It also reflects society's dependence on centralised governance with a dangerous amount of misplaced trust." Goes against the grain: "Blockchain in a sense was built to offer self-sovereignty, to free up people, to give them control of their funds and information. But because of convenience we basically allowed ourselves to again be deluded and again give all our money or assets to one person or company. That completely goes against everything that blockchain offers," Madan asserted.Sharing the blame: "While it is hard to pinpoint one person, other than Sam [Bankman-Fried] himself, on who is to be blamed, they all played some part or the other. If some investors overlooked [faults] because of FOMO, then ofcourse they are at fault," Madan said. The extent of fault is so limited by scope of these various parties that you can't really individually blame them. It is a lesson for the industry and the ecosystem as a whole, he added. However, Mehta had a different take: "Decentralisation is a difficult state to achieve. And it happens with community participation. Blame isn't the right operative word that I would like to use – inability to create honest and efficient decentralised systems is what is the major cause of such implosions."Three-pronged approach: Commenting on the fact that the first principles of business were not followed by FTX, Madan recommended what centralised exchanges can do. "Let's say they are keeping crypto of users, they need to have three parties involved. First, they need to have a custodian to make sure that this crypto is not on their books so that the users have the rights to the underlying assets, not the company. Second, they need to have an auditor who on a regular basis would be making sure that whatever is reflecting on the exchange is backed 1:1.Third is an insurer to make sure that the custodian that you have atleast offers some kind of insurance on top of it. In a worst case scenario, even if the custodian goes down because of a hack, there is some kind of solace available to these investors," he said. India's Crypto Run: Can RBI Step Up To Secure Digital Investments Amid Meltdown?Proof of reserves: Along with public audits and investor protection funds, Mehta also recommended having proof of reserves as a way of preventing centralised crypto exchanges from messing with customer funds.PoRs prove the reserves of an entity such as an exchange by pulling data from the places where those reserves are. If FTX had released its PoR audits, then depositors would know what was backing their deposits. They would have been less surprised about FTX's solvency and likely wouldn't have engaged in a bank run or sudden withdrawals, according to Sergey Nazarov, the cofounder of decentralised network Chainlink.Transparent execution of transactions: "For example, Uniswap. You can basically go and verify in their smart contract whether they have sufficient funds or not. You can see who added liquidity and what kind of transactions are happening. In an automated market maker, that's not going to happen unless a hack takes place. Even then you would be able to trace the wallet address that has caused it," Madan said. A smart contract is a computer-signed agreement between a decentralised finance (DeFi) platform and a borrower, which is uploaded on the blockchain. Thus, the contract is in public view and tamper proof. Meanwhile, automated market makers like Uniswap are essentially mathematical formula that determines the price of an asset you want to buy or sell on a DEX.Too many barriers of entry: "The motivation from the users to use DEXs [is low], there are a lot of barriers to entry, whether it is being technically sound enough to understand how trades are being executed, slippage fees, front-runners, etc," Madan said. Since the protocols vary, the governance of such systems and understanding them before investing remains a key neccessity to understand the flaws in product design or governance centralisation or possibilities of code/ protocol/ data structure level vulnerabilities if any, DigitX's Mehta told The Quint.Confusion over compliance: "If we talk about just India, when executing a trade between USDT and Ethereum, there might be multiple trades getting executed in between that in the same transaction. As per the taxation that has come out, I am obligated to pay 0.1 percent TDS on all of them which is something that's confusing for me as a user, thereby limiting my motivation again," Madan explained. We will require some kind of a seamlessness if we want the masses to adopt DEX, he added.Where is Web3 going? "Right now we are at that stage at Web3 where the internet was in the early 90s, when everything was so inconvenient, you had to put up a dialup and that used to make a weird sound and you had to wait for a page to load for a whole minute. Now, the internet is completely invisible to us. So in the future there will be a point where Web3 becomes completely invisible and works in the background. That's when we will start onboarding masses," the startup founder spelled out.Silver lining to FTX bust: "A lot of startups, a lot of them from India as well, raised capital just on the basis of a whitepaper, it didn't do anything. They moved to Dubai and were having these luxrious parties from their investors money because they don't have to pay it back, its not like they've given any equity or there is some kind of governance, none of those things. It's just a token and the token went live and it did well on the first day but its dropping ever since. The thing that FTX crash had done is, it's now starting to weed out those kind of entrepreneurs," Madan opined. "It's important to cut this supply line and make sure that a better class of entrepreneurs can come in, builders can come in and actually innovate in this space, and create products that users are going to love and use in their everyday lives," he further said. With Twitter Chaos and FTX Going Bankrupt, Trust in Digital Tech Hits New Low

BECOME A MEMBER

FTX Has Collapsed: Can Other Centralised Crypto Exchanges Bounce Back?

The collapse of FTX has led to investors calling for more transparency. Can decentralised exchanges be the key?