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The FTX Saga: Lessons We Thought We Knew, But Didn’t Learn

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Months after Terra, Three Arrows Capital and a host other industry-leading companies collapsed, the crypto sector has suffered another major blowout. What lessons can we draw from this crisis? Cover art: Jeenah Moon/Bloomberg/Getty Images. Relight Motion (edited Mariia Kozyr).
Key Takeaways: The collapse of Sam Bankman Fried’s empire shocked the crypto industry and set it back several years.
Bankman-Fried rose to prominence because the industry ignored too many red flags.
If crypto had stuck to its core tenets, the FTX disaster could have been avoided.
Share this article It will take months before the dust settles and the full extent the damage is revealed. Rule 1: don’t trust your keys, not your coins; and Rule 2: don’t trust, verify. Rule 1: Don’t trust your keys, not coins; and Rule 2, don’t trust, verify. Crypto pulled a complete circle after Satoshi Nakamoto published their blueprint for a “purely peer-to-peer version” of electronic cash. This whitepaper was published 14 years ago. It stated that online payments could be sent directly from one person to another without having to go through a financial institution. However, most of the crypto trading volume occurred on centralized exchanges. Satoshi clearly stated their motivations for creating Bitcoin, stating that they wanted to eliminate financial system dependence on third parties. Although the Satoshi pseudonymist was a genius, it wasn’t their idea. Nick Szabo, a polymath and the godfather of smart contracts, wrote a blog post entitled “Trusted Third Party Security Holes” in 2001. It outlined the dangers and essential need to create systems that don’t rely on trusted third party. Then Satoshi arrived and created an alternative; Bitcoiners–especially “those pesky toxic maxis” crypto followers love to hate on–intuitively understood the underlying idea, latched onto it, and prophesized it to the masses. “Not your keys, but your coins” became the space’s mantra. It was meant to emphasize the importance of crypto self-custody and not relying on central intermediaries. Yet, many people ignored this warning. Despite numerous warnings, including those of QuadrigaCX and Mt.Gox, thousands of crypto enthusiasts, some industry veterans, saw their fortunes destroyed by using centralized crypto exchanges and lending platforms. People chose not to “verify” and blindly trusted untransparent, inherently risky businesses. Black boxes were filled with billions of dollars and custodied in the hands of self-serving egomaniacs while the industry remained silent. After launching FTX in 2019, Sam Bankman-Fried made a name for himself in crypto after he plunged billions into black boxes and was custodied by self-serving egomaniacs. He became a well-known industry figure and a popular media darling without proving any prior competency. In fact, he was the world’s most successful under-30-year-old when FTX reached a staggering $32 billion in 2022. Bankman-Fried is known for his geeky persona. He plans to give away his vast wealth through effective altruism. His wealth was derived from rent-seeking and selling wholesale hoppy to venture capitalists, who then resold it to tourists looking to make quick buck by flipping the latest crypto coins. The firm facilitated the sale of governance tokens for dozens of promising DeFi projects, then dumped them into oblivion, often irreparably harming both retail investors and the projects themselves. Bankman-Fried became an avid supporter of Solana, the Layer 1 network whose total worth was largely inflated when two brothers impersonating DeFi developers inflated it. Since 2021, Solana has been impacted by FTX’s collapse. Bankman-Fried spent the year advertising FTX on billboards and lobbying for the Digital Commodities and Consumer Protection Act (DCCPA), which, if enacted would effectively end decentralized finance. He basically wriggled his way to the top, then tried to pull the ladder below him to sabotage everyone else. Alameda Research was headed by Caroline Ellison, a 28 year-old junior trader at Jane Street. She revealed via Twitter in 2021 that she had used amphetamines. She wrote that “nothing like regular amphetamine usage will make you appreciate the dumbness of a lot normal, non-medicated human experiences.” Fast forward a year and Ellison is at the center of the FTX scandal. It was revealed that Bankman-Fried had moved approximately $10 billion of FTX customers money to help the firm fight an insolvency crisis. There were probably many more shenanigans going on behind closed doors. Some of these may surface, but Ellison and Bankman-Fried were obvious. But very few saw the fraudisteric antics of Ellison and Bankman-Fried. We believed their lies despite having seen several similar episodes of the same soap opera in the past year. Unfortunately, there are still many red flags in the industry. We Never LearnLast week’s crypto-related events are not new. History is full of examples of power, money, trust, and abuse. Satoshi created Bitcoin to eliminate the need for trust and prevent abuse. It seems that we can’t help but be selfish. In Margin Call, Jeremy Irons’ final monologue sums it all perfectly. “It’s just cash; it’s made up.” We don’t have a need to kill each other to get food. It’s not a mistake. It’s not different now than ever. 1,637. 1,797. 1,819. 37, 57. 84. 1,901, 07. 29, 1,937. 1,974, 1,987. Jesus, didn’t that fuck you up good–92.97. 2,000. Or whatever you want to call it. It’s the same thing over and again; we can’t help but to do it.” Change the years of financial crises with crypto bubbles, i.e. Mt. The parallels between Gox, QuadrigaCX and Voyager Digital are obvious. It’s just the same cycle over and over again. It seems we never learn. The crypto industry was able to reverse the clock, cherry-picking and reproducing many of the negative aspects of the traditional financial system it had sought to overthrow. Trusted third parties, shady offchain dealings and uncollateralized borrowing for unabated risks–we did it all in typical cypherpunk fashion. Only this time the government and central bank’s infinite balance sheets won’t be there for the blow, privatize gains, or socialize losses. This didn’t happen because crypto is a scam or because it was unregulated. FTX was a regulated business under the full laws and regulations in the same off-shore jurisdictions that your politicians use to hide their wealth. This means that a regulated company did something illegal without regulators catching them. This is quite shocking. Disclosure: At the time of writing, the author of this feature held ETH and several other cryptocurrencies.Share this articleThe information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. does not act as an investment advisor. 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