Did the crypto industry learn nothing from Mt. Gox?

I began my blockchain journey in 2014 – around the time of the Mt. Gox hack, when most were heading for the exit from Bitcoin. As cryptocurrency crashed from US$1,100 to less than US$200, I witnessed the push for greater decentralization.

Centralized setups like Mt. Gox, with fund safety and order-matching reliant on those running the exchange, were no longer the future. I saw resolve across the industry to focus on the founding principles of blockchain: transparency, trustlessness, and verifiability.

For the next eight years, secure and non-custodial trading solutions sprouted up. Just when it felt like we were on track to establishing the post-Mt. Gox ideals and realizing our vision of secure and transparent crypto trading, FTX imploded in a matter of days.

Photo credit: Shutterstock

Where are we now?

FTX’s collapse was shocking not only because of the damage to users – over US$8 billion potentially lost – but also because it was regarded as one of the industry’s safest centralized exchanges (CEXs).

What warning signs did we miss? How did this come to be despite the push for decentralization after Mt. Gox? And most importantly, where do we go from here?

To answer these questions, we need to first look at other centralized players in the space and question whether they offer the security and reliability we need.

The most obvious candidates for such analysis are other CEXs like Binance and Coinbase. CEXs have been custodial so far, meaning they hold users’ assets in their centralized wallets.

There was no transparency on how user funds were maintained and secured (e.g. via proof of reserves) or how the exchange used them (e.g. FTX providing customer assets to Alameda). Was this the best setup? Already, ideas like non-custodial CEXs and on-chain proof of assets solutions are being proposed in the FTX aftermath.

Another risk factor is centralized stablecoins. The table below gives an overview of the top five stablecoin issuers, representing a total market capitalization of US$138 billion. While only 4% of this supply is managed by Dai, it currently has more than 50% backing from USDC. This highlights the risk of contagion if any single point of contact were to fail.

Alongside centralization risk, we are facing a general decline in crypto adoption. Trading volumes of non-fungible tokens are down 99% from their peak, and yields from decentralized finance (DeFi) are no longer as attractive.

How did we get here?

In a post-collapse interview, Sam Bankman-Fried (SBF) said a lot of the work he did at FTX was about presenting one image of his values – open to regulation, altruism, risk management – while another set of values – becoming big, getting positive public opinion, money matters – had guided his decisions.

What allows people like SBF, Do Kwon (co-founder of failed stablecoin project Terra), and Su Zhu (co-founder of bankrupt crypto hedge fund Three Arrows Capital) to thrive so spectacularly in the industry?

Where do we go from here?

This too shall pass