With the implosion of FTX and the general panic within the crypto bear market, more people are turning towards self-custody as the only defense against the systemic failure of Crypto’s centralized intermediaries.
Background: FTX and the Crypto Contagion
The Crypto contagion erupted when FTX revealed that they were actively using customers' funds to trade through Alameda Research, an FTX holding company. FTX was a popular centralized exchange backed by major celebrities like Tom Brady and billions in venture capitalist dollars.
The truth unfurled on Twitter through a series of tweets between the FTX CEO Sam Bankman-Fried (SBF), Alameda CEO Caroline Ellison, and Binance CEO Changpeng Zhao (CZ). Throughout a two-week-long period of nail-biting revelations, retail customers, investors, and the entire Web3 community witnessed how one of the most popular exchanges used the inherent opaqueness of centralized entities and redirected customer-deposited funds through "backdoors" to Alameda in a series of illegal operations, and then lost it all betting the house.
The Crypto contagion started really boiling when Alameda Research revealed that it leveraged a significant stake in FTX’s own $FTT token and other illiquid assets as pledged collateral for billions of dollars in bad loans as the tokens collapsed in value.
In the end, the exchange mismanaged over $10 billion of customers' funds. This caused many customers and companies holding their digital assets on FTX to go bankrupt or report significant losses, such as BlockFi, Wintermute, Multicoin Capital, and more.
For a complete timeline, crypto wallet transaction receipts, and tweets, explore Coinfeed's open excel sheet of events; things are still unfurling as we learn more about what happened in the months preceding FTX’s shocking collapse as FTX’s bankruptcy and SBF’s criminal trial unfold.
DeFi to the Rescue
Of course, the whole crypto community is shaken to the core, especially amid a bear market. Although global Crypto adoption had tremendous growth in the last two years (especially in emerging markets), the FTX scandal has caused many users to move their crypto assets away from centralized exchanges into safer blockchains until the contagion is resolved. They now see self-custody as a more trustworthy solution for protecting their wealth on-chain, as it seems an endless stream of impact from the fall of FTX is still playing out, and no one knows what shoe will drop next.**
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On a positive note, Uniswap tweeted they experienced an all-time high with over 55,000 daily new transactions on their DeFi protocol in November. The self-custody initiative may have re-awakened during the FTX blunder, but this sentiment has been a driving force in Crypto's philosophy the whole time. According to an article on Coindesk, more Crypto users are turning to DeFi protocols. The evidence? During this period, there has been an influx of on-chain interactions – like new accounts and the total volume of digital assets on platforms like AAVE, Curve.fi, and Yearn.Finance has increased tremendously as the crypto community embraces DEXes and other DeFi protocols.
It's no secret that the Crypto space is rife with hacks and scams. Yet DeFi might be the key to the mass adoption of cryptocurrencies. DeFi is an ecosystem of software code that allows you to buy, borrow, lend, or trade your crypto assets without going through a centralized third party like FTX, BlockFi, or Celsius. As we’ve seen, these entities tend towards collapse, due to their inherent opacity of their balance sheets, and the lack of clarity on how to regulate them effectively (or if it’s even possible to regulate them safely at all). With DeFi, the balance sheets are visible as immutable smart contract code.
The risks involved with DeFi are similar to those involved with regular crypto trading: there's always a chance that something could go wrong and cause your coins to disappear forever (or be stolen). But while those risks have been pretty high lately—with over $3.5 billion lost from hacks this year—they're still lower than those associated with traditional finance, as evidenced by FTX’s singular loss of over $10 billion in assets.
The Future of DeFi
If you're a blockchain developer, it's your responsibility to build solutions that help people. And as we've seen over the past few months, developers have a lot of power to do just that. If you want to help empower new crypto adopters and give them the tools they need to be their bank, then building solutions on top of DeFi is one way to make that happen.
When you peel away the hype and start looking at what makes DeFi an innovative alternative to the traditional banking system — you'll find four key opportunities to focus on when it comes to building mass adoption.
- Privacy
There's no such thing as "perfect privacy." Privacy tools like Tornado Cash are threatened by the same lawmakers and regulators who failed to protect you from FTX, Celsius, BlockFi, etc.
Privacy tools bridge the gap between the transparency of the rules, their implementation, and your ability to "hide in a crowd.", thus allowing you to gain the freedom to interact with others the way you want.
European-based developer Emiliano Bonnassi recently built Loadbalanceeeer, a privacy feature built using Python that will anonymize your node RPC traffic through TOR. Not only that, he created this new way to interact on-chain with 32 lines of Python! This is one great example of how we can improve DeFi privacy at the networking layer.
2. Usability
The cost and fees associated with interacting in DeFi could be a massive barrier for developers and retail traders. However, various tools can decrease the associated costs. With Ape’s new gas reporting feature, developers can analyze their interactions with each line of code in their projects. There are plenty of other ways to reduce the costs and complexity of working with on-chain transactions, we’d love to hear what you are building to improve usability.
3. Security
Many hacks in DeFi come down to lax security when developing smart contracts. One way we are trying to make Ape better is working on more advanced smart contract verification tools like cross-chain testing.
Currently, developers have to substantially mock out a live multi-blockchain network, which means the testing doesn’t match the production system very well. ApeWorX is working on unlocking multi-chain application testing workflows with Ape to mirror the real environment as much as possible, as it is crucial for tightening security and decreasing hacks!
4. Education
If we go full-on diamond hands with self-custody, this will require understanding more about finance, blockchain, and how these two are interconnected. ApeWorX is doing their part by teaching developers how to store their private keys and assets on-chain safely using Ape Academy tutorials. Explore our videos on Ape Academy here.
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**In the realm of Web3, it's important to remember that "trust" is not always a bad thing. Everyone wins if they join together to build DeFi and loses if they don't. The more secure we build these systems, the more money will move over to them as trust in the idea of DeFi as a solution to the failings of traditional finance blooms. The best pathway to get there is educating more normies about how DeFi works so they can see how they can benefit from this technology without having to trust anyone or anything but themselves!
Further Resources:
Companies affected by FTX Contagion
A timeline of FTX Collapse https://docs.google.com/spreadsheets/d/14Rh8Q_NdongVHdfrriAXMB8aLNGWcy9AKnXRFBDAndo/edit#gid=0
Global crypto adoption has experienced over 880% growth rates in 2021 and beyond https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index/
The concept of DeFi exists because no company or person controls it; instead, the community powers the management of these systems. The smart contract ensures people get what they're owed when they make a transaction and that no one gets ripped off. Keep up to date and learn more about DeFi on Ethereum.org.