5 lessons the crypto industry needs to learn from the FTX disaster
The FTX implosion has resulted in billions of dollars in losses for investors and consumers, but it also has important long-term implications: Loss of public confidence in the crypto industry. In response, business owners and others must ask how this happened and what we can do to prevent it from happening again. We must commit to targeting unscrupulous or irresponsible actors while continuing to push the boundaries of Web3. I’ve been in this industry since 2015 and here are five things that need to happen for blockchain technology to reach its potential.
First, we need a legal framework that protects users while still encouraging innovation. The status quo of regulation through enforcement must end. Politicians and industry leaders can work together to create something similar to the 1996 Telecoms Act, which created the conditions for innovation to thrive responsibly. Any new rules must distinguish between the technology and the companies that build on it. Get inspired by the Internet – we don’t regulate network time or hypertext transmission protocols (aka the Internet). Still, we try to regulate platforms like PayPal, ISPs like Comcast, and other companies like Amazon that use these protocols. In the event of disasters like FTX, policymakers need to understand that the main problem is not decentralization but over-centralization in crypto corporate intermediaries hiding their decision-making and financial health from the public.
Second, let’s keep in mind what makes blockchain technology disruptive and focus our efforts on developing products and solutions that play to their strengths: that they enable anyone to move, store and peer their wealth and assets anywhere to peer to manage. Let’s support the entrepreneurs trying to build a better web and a more inclusive financial system for everyone. Blockchains are the first digital medium for value, just as the internet was the first digital medium for information. Our digital economy needs a digital native asset class for payments, savings and other financial instruments. The next wave of entrepreneurs in this space should focus on building simple, accessible Web3 applications that appeal to broad sections of the population and solve real-world problems rather than obscure trading apps and esoteric financial tools. Build products that ordinary people want and need and can understand.
third, let’s end the hero worship around crypto founders running centralized companies. The reality is that middleware like FTX doesn’t have to dominate the industry. Finally, what makes Web3 so compelling is that it’s permissionless and decentralized, meaning anyone, anywhere can own digital assets, manage them peer-to-peer, and have a say in their governance. Bitcoin was the first to make this possible, and Ethereum and DeFi applications have accelerated this. To its credit, FTX offered a great interface and experience, but it needed more transparency, better risk management, and stronger governance. Companies like FTX have served and may continue to serve as important gateways to this asset class and the wider world of Web3. However, the ramps to a branch must not define the branch. Binance currently accounts for half of all crypto asset volumes. Today we may sing her praises for her survival, but focus like this should worry everyone.
Fourth, We need to support companies that want to build Web3 using public blockchains. Many large corporations have been tinkering with permissioned blockchains and other closed systems for years and are ready to make the leap to Ethereum and other public infrastructure. These platforms failed to deliver value, but they did expose these companies to the technology. Now let’s build more ramps so they can use this public infrastructure for commercial applications in the real world. NFTs are a good place to start as they can “talk” a large company on Web3 and open the doors to further innovation. Web3 users and creators will benefit from more corporate innovation in this space, but so will investors – after all, the hundreds of companies using this technology also likely need to own the underlying asset to run a node and pay gas fees and so on .
Finally, we must acknowledge that while self-custody is a feature for some, for others it is a significant barrier to Web3 adoption. That means users in this space still need trusted service providers. Web3’s technology tools are not intuitive for everyone, and many users have legitimate concerns when it comes to holding their own assets. Roneil Rumburg, founder of Web3 music platform Audius, recently told me that the FTX issue “should result in more time/resources being spent on improving the user experience of fully self-directed, decentralized digital asset management tools,” although he acknowledges that “it is possible”. To be a self-sovereign crypto user today, the usability bar for it is still so high that it is beyond the reach of many mainstream users.” Web3 innovators are making more accessible tools, but individuals and companies in particular still need trusted agents and Partner. Let’s support good actors through industry standards such as proof of reserve requirements, sensible regulations and social consensus and collaboration – in other words, call on bad actors when they emerge and support those who tell the truth to those in power.
Web3 should make too-big-to-fail intermediaries irrelevant. With FTX, we got exactly what Bitcoin’s creator, Satoshi Nakamoto, wanted to divert: a centralized organization using its leverage to take excessive risks in a loosely regulated market. In the end, retail paid the heaviest toll. We must emerge from this crisis with a renewed commitment to not only build secure, simple, decentralized tools based on open protocols, but also to regulate centrally controlled financial intermediaries, regardless of what technology they use.
Alex Tapscott is co-author of the best-selling Blockchain Revolution, co-founder of the Blockchain Research Institute and CEO of Ninepoint Digital Asset Group.
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