What a wild week. We wanted to let the dust settle before chiming in and trying to make sense of what had just happened.
One thing is for sure, Kanye 'Ye' West wasn't the only 'genius' to lose a billion dollars this week.
Sam Bankman-Fried's FTX Cryptocurrency Exchange hit the wall at breakneck speed after catastrophic missteps saw between 80%-90% of its value evaporate overnight like spit on a hot skillet.
Two catastrophic errors brought the exchange to its knees and sent the DeFi markets spinning this week:
Misstep #1: Coming to the rescue of other crypto businesses amid interest rate hikes which put his empire under severe financial stress.
Misstep #2: Prematurely announcing that his nemesis Binance would acquire his business due to a 'liquidity crunch' - one assumes caused by misstep #1, where he needed to cover his mounting losses.
Misstep #2 severely spooked FTX's customers, who rushed to withdraw around $5Bn worth of assets without possibly knowing that FTX could only cover 80% before it ran dry.This event was essentially a 'run on the bank,' which contradicts the entire ethos of decentralized finance. After all, crypto was the phoenix that rose from the flames of the 2007 centralized financial crisis.
The problem with crypto exchanges is that they add a centralized layer over decentralized finance by pooling a large group of customers' assets in one place. They usually have inadequate liquidity rules or reliable stress tests in place.
These unfortunate events sent the DeFi markets reeling this week, and cryptocurrencies exposed to SBF's activities were severely impacted. Solana dropped around 40%, and Bitcoin slumped by 20%, depending on your timeframe.
SBF offered the following eloquent mea culpa: "I'm sorry. I fucked up." Yes, sir, you did.
He has promised FTX US's customers that their assets are safe (what about foreign customers?). As of writing this, FTX no longer accepts new customers and states that withdrawals are on hold.
Some have said that SBF might have been raiding the FTX coffers to play knight in shining armor to the businesses he helped months earlier.Between that and a string of outstanding legal issues, Binance's Changpeng "C.Z." Zhao, who already owns 20% of FTX, decided to pull out.
Note: Financial regulators worldwide have issued warnings about placing assets with or trading on Binance, which currently operates without a license and has allegedly violated international money laundering laws with Iran.
Allowing wild-west exchanges to have custody of your digital assets has proven time and time again to be a risky endeavor. Custodial crypto wallets might be easy to use, and you don't need to worry about those annoying private keys. But, when the proverbial fecal matter hits the fan, custodial wallets are a terrible idea if proper ownership matters to you.
DeFi users should switch to non-custodial or self-custody wallets if they want to access their assets -- no questions asked -- when bad stuff goes down.
We must take greater responsibility for the custody of our digital assets and private keys and not leave our financial destinies in the hands of others, especially entities that seek to centralize an ecosystem designed to be decentralized.
Exchanges can be necessary to convert crypto to fiat and sending to your regular bank account. But the lesson is to only store your assets in one for a short period.
With Web3, we are all essential pieces of the decentralized revolution. We are part of something bigger than each of us, yet we are all responsible for shaping its future.
Therefore, it is incumbent on all of us who roam and graze in the pastures of DeFi, to be responsible throughout the transaction lifecycle if crypto is ever to shed its unfair reputation.
Until next time. We're off to buy the dip!
P.S. That did not constitute financial advice.