For industry veterans, who have been actively contributing to the crypto space since the year 2012 or 2013, the FTX crash is not all that surprising. In the face of perpetual regulatory uncertainty from leading Western nations, many crypto startups have taken advantage of regulatory arbitrage for the sake of hypergrowth, which has led to many such sudden crashes. Over the years, those who played by the rules were seldom rewarded in a market fraught with 100x levers. Of course, there’s a fine line between healthy technological disruption versus outright scams and fraud. In light of the FTX crash, the path forward has actually become clearer: TradFi will eat CeFi, while DeFi will continue to grow in its own self-sustaining ecosystem, advancing the world towards self-custody and permissionless finance.
Zooming out, there are two paths concurrently unfolding: Heavily Regulated Middlemen Service Providers vs Open Source Permissionless Protocols. For the former, it is self-evident that the incumbent banks, brokerages, trading firms, asset managers, custodians, consortiums of closed-loop networks, etc, have been gradually coming into the crypto space over the last five to seven years. Starting in 2015, the year of “Blockchain Not Bitcoin,” the likes of JP Morgan had already started dabbling with private blockchain networks and failed. Then, in recent years, the same incumbents have been experimenting with public permissioned networks. It is still to-be-determined, if there’s a product-market fit there, although I am personally bullish on layer3 appchains being adopted by Web2 enterprises as an acceptable middle ground. Alas, we have Fidelity turning on retail crypto trading; Blackrock has done a 180-degree turn on its stance on crypto; banks and core banking service providers are adding crypto offerings, and Wall Street trading firms have been operating crypto arms for years now. So, with the FTX crash, these true whales and sharks are circling FTX (and CeFi in general). They will fill the vacuum of retail and institutional demand for crypto. And quite frankly, they are relatively best positioned to do so (rather than the likes of opaquely-regulated offshore CeFi exchanges doing it). And that, in my opinion, is the first path, that TradFi will eat CeFi.
Now to the heart of what excites everyone in the crypto-native space: Given all the crashes and contagions this year, DeFi has held up quite well, proving a level of resilience that is robustly insulated from off-chain events. We saw hardware wallet sales skyrocket immediately following the FTX crash. We saw collateralized loans being paid back to DeFi protocols before bankruptcy gravely affecting off-chain creditors. What this means is that self-custodied access to DeFi has found its own right to exist on the world stage. The self-sovereignty of holding one’s own keys to perform various financial intents where the only counterparty risk is smart contracts can make more sense than trusting any middlemen who may eventually misuse your funds.
This is not to say that DeFi doesn’t have its own problems. During this bear market cycle, it would be prudent for crypto-native teams to prioritize security. To build methodically. To employ hard skills to create cutting-edge technical products with the utmost professionalism and ethics. To build products and protocols that have real value and utility. Do not chase after growth for the sake of growth. Do not build products for the degenerate gambler, with poorly designed liquidity mining programs backed by marketing amplifications that simply do not stand the test of time. In the crypto space, proof of time duration matters more than anything else. It is an implicit signal that something is secure, that it works across time, that it is immutable, and therefore trustlessly trustworthy. Crashes within CeFi/TradFi can be answered in a court of law, but a hack or security compromise within DeFi has little to no recourse, regardless of law enforcement’s best efforts. This is the time to tune out the noise and focus on building secure, open-source, public goods that contribute meaningfully toward a better world.
During the last nine years, I have given my career to the crypto cause. I have lived through three bear markets and three bull runs, witnessing lots of exit scams, outright fraud, and poor builds that led to massive hacks and scaled attacks. I myself have been hacked and wiped out several times (including this year, haha). Even so, I’ve never been more bullish on the crypto space. This cycle, like every other cycle, will pass. Zoom out and see that technology is deterministic and inevitable. The builders will keep building. The investors with high conviction will continue funding deserving projects (although with a tighter belt in the short run). Tier1 Web2 enterprises and proven Web3 protocols will continue to integrate with a bidirectional interplay. And as Wall Street and regulators come in to protect consumers and investors, Web3 will continue to onboard users who wish to protect themselves.
About the Author
Jack Jia is the Head of Crypto at Unlimint, a seasoned payment company with 500 employees and a 13-year track record building regulated payment infrastructure. Gatefi by Unlimint is their latest product, a web3 onboarding tool that helps users to move value seamlessly between their bank accounts and their self-custody wallets, to access Defi, Gamefi, and NFTs. Learn more about Gatefi or follow Jack on Twitter at https://twitter.com/demonopolize
Unlimint is an all-in-one future-focused fintech solution that provides fast-growing, innovative businesses with advanced payment capabilities through an evolving financial interface. The company embraces a wide range of financial platforms to allow startups and entrepreneurs to expand globally and provide them with a seamless digital finance management experience. Headquartered in London, Unlimint has over 400 employees across 16 offices and five continents, including Frankfurt, Singapore, São Paulo, Hong Kong, and Mexico. For further information, please visit: https://www.unlimint.com/