The post-FTX future is a decentralised one
An introspection on what separates DeFi from CeFi
As the industry licks our wounds and prepares (yet again) for the onslaught of criticism against crypto, it would be timely to remind ourselves how we got to this stage.
Centralisation, blind trust, and greed.
There is a deep irony to all these. Formerly lauded as the solution to our society’s unbalanced power dynamics, Web3 is now the subject of derision in mainstream media. It is widely portrayed by conservatives as a cautionary tale on investing in volatile assets. Such view is misleading at best.
Centralisation leads to fiasco
What the media and critics are getting wrong is that the recent meltdowns in crypto has actually made the case for Web3 and decentralisation, particular DeFi, even stronger. From Luna to 3AC and Celsius to FTX, the number of early warning signs of failure were positively correlated with the level of decentralised information available to the public.
Luna and FTX are at two ends of the spectrum. For Luna, all the accounting was done on-chain. The supply of Luna and UST was known, as was the yield that the Anchor treasury could generate. As such, the risks to the protocol’s long term sustainability were evident. Skeptics were already sounding alarm bells (a case in point - this Reddit thread) before any hints of UST depegging were observed.
With regards to FTX, investors were kept in the dark over the scope of risks that they were taking on. In fact, FTX employees were allegedly misled by CEO Sam Bankman-Fried over the exchange’s liquidity issues. They even released false statements to reassure the public of the company’s solvency when the bank run first started. Yet within a matter of days, the leveraged house of cards came crashing down.
At the time of writing, Crypto.com, Gate.io and Huobi are also facing controversy on Twitter. Observers are speculating that these exchanges are sending each other funds to cover up holes in their balance sheets. It is seen as an attempt to reassure the public and prevent potential bank runs. CEXes scrambling to compile proof of reserves serves as a sign of how public confidence has plummeted. Those remaining are left wondering if any CEX is safe to use.
However, blaming the FTX collapse solely on a single individual downplays the company’s complex (and seedy) structure and operations. Recent events have largely occured due to blind trust from all parties involved, from the casual retail trader to the 44 VCs (including more than one government-linked agency) and angels who invested in the $32 billion project.
Humans are the problem, not the tech
One could claim that an equal level of fraud happens in both the Web3 and TradFi worlds because the only perceptible constant is human greed. The only reason we have uncovered so many nefarious Web3 deeds in such a short period of time is due to the open and transparent nature of the blockchain. In the traditional markets, an event like the collapse of Luna and FTX would likely not have been dissectible by the public at large. Most skeletons would have been kept in the closet, accessible only to an oligarchy of the rich and powerful. Thankfully, there are many public actors predisposed to being skeptical of trusting opaque entities.
Human nature is fundamentally flawed.
We see this from the unending revelations of fraud, insider trading, and corporate espionage across various industries on our daily news feed. Crypto’s only crime is serving as a conduit to accelerate this process. It has peeled back the layers and exposed the ugliness of what has always been there - a reflection of our innermost desires.
How DeFi curbs human flaws
Web3 aims to break pre-existing sociopolitical hierarchies and redefine the intersection of money, influence and power. The open-source nature of DeFi holds us accountable. Individuals are fallible and yet, we can rely on the majority who have a vested interest in ensuring that one does not fall prey to each other’s greed.
Much has already been said about the application of game theory, particularly the prisoner’s dilemma, in cryptoeconomics. In short, the concept presents a situation where two parties, separated and unable to communicate, must each decide whether to cooperate with the other or not. Each party reaps the highest reward when both choose to cooperate.
In DeFi, balances on protocols and DEXes are always public. If we combine this fact with game theory, it means that rational actors are incentivised to act honestly in order to avoid losing their investments. Additionally, if we assume that the code was written with no malicious intent, there would unlikely be fraud or deceit to the scale of what we have seen today.
Trust code, not people.
That being said, DeFi is not perfect. The infrastructure that would support the widespread use of DEXes is nowhere near its final form. Recent findings regarding the sustainability of the automated market maker (AMM) model have cast doubt over which pricing mechanisms actually work. However, rest assured, the tech will likely get better.
On the other hand, human nature is, by and large, fixed or immutable. External factors, such as the influence of civilisation, may produce variables in human behaviour. Yet we fundamentally carry the original sin, if you will. We continue to be slaves to our banal desires, with fear and greed driving every decision we make. This trait has often been inferred, and at times explicitly presented, throughout the history of philosophy - from the likes of Hobbes, Machiavelli and Nietzsche among others. Fortunately, some of us have recognised that the human condition has to be curbed for the greater good. By itself, code is not subject to temptations and greed.
It is hard to deny that we could eventually be heading towards a dystopian future where robots control the world, but it is our best bet now. We take what can in order to deal with what we have to; and leave the rest up to fate.
Failure is an opportunity for growth
To the dissidents, whose opinions of Web3 fluctuates in parallel with the price of Bitcoin, we say: doubt all you want, but we are here trying to change the status quo because what else can we do if not try?
The sudden collapse of FTX is saddening for many, but committed builders and investors continue to take the long-term view. Humanity’s saving grace is hope. Hope that we may build a better future yet.
What’s your take on the CeFi vs DeFi debate? Leave your comments below!
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