Industry News The FTX Breakdown and Hard Lessons

The FTX Breakdown and Hard Lessons

November 15, 2022

The collapse of the FTX digital currency exchange has not been just a big blow for the cryptocurrency space of the present moment. It has also been a huge hit for the coming months and years, where the current setup, for better or worse, will not be something that can be easily replicated. Instead, the feeling is that trust has been broken and that the present level of vulnerabilities will be a huge issue that the community has to overcome. The direction of that repair process is less clear but there is a wealth of experience that has dictated similar situations in the traditional markets and finance in general. 

The technology did change – the modern world has the ability to swap money and assets easily using the regular internet protocols that are propped up by blockchain technology. That tech allows for transfer monitoring as well as balance verification, providing a space that is completely decentralized at the same time. But, the FTX situation shows that the same setup still has a range of problems and potentially devastating breaking points. That is why many analysts and even cryptocurrency developers believe that no matter how much esports players and crypto evangelists love the decentralized concepts, there is still not just a need but a necessity for centralized services.

External and Internal Systems

The fiasco of the most recent major crypto collapse can be perceived as an interplay of external and internal systems working at the same time. Ordinary users might not care about these too much, but their importance is still immense and in this time of prolonged crypto winter, possibly one thing that will chart the future course of the digital currency domain. 

As systems, these function in very different manners. But, together, they create a space that is very real and consequential for all those active inside of it. There is no escaping either of these two systems and they will appear at almost any point in time, present, past, or future. Once more, their interplay resulted in the collapse of the FTX and the damage it did to the future prospects of the crypto space, including its biggest member, the BTC network.

Emotions of Internal System

The internal system represents the emotional processes of users, no matter if they are crypto users in general or FTX users directly. At a base level, all humans are prepped and geared for survival and humans tend to rely on others for the same process. That is genetically ingrained in the human animal species and it is the direct reason why tribes came to life, followed by nations and countries. Belonging to a group feels good for almost any individual. This is as true today as it was tens of thousands of years ago.

Banks and financial companies, just like digital currency exchanges, function in part on this notion of getting together to do things more easily and effectively. The parallel in the area of finance is the notion of convenience and inter-reliance, which is why so many people opt-in for platforms and services that help them complete some process. But there is an inherent danger in gathering together, especially when the central linchpin can endanger not just that community, but a broader space around it as well.

Facts of the External System

Unlike the emotionally-based internal system, the external setup represents a regulatory environment where all people are in some shape or from life. In the case of financial services, regulatory systems are in place to make sure that both the organizational entities and their uses are protected. Here, there are many potential avenues there. Either of these or both are in some kind of danger. Those dangers can be very diverse and sometimes come from neglect and other times from malicious Intent. In any of those cases, the resulting damage is substantial if there is no means of protection. 

The entire notion of a regulatory framework is to provide assistance, protection, and damage mitigation. But, more often than not, they use these regulatory frameworks and simply go for convenience. That even a very badly defined regulatory environment leaves their users without any formal protection. In the case of cryptocurrencies and the FTX exchange, the internal system generated a lot more influence than the external one. The damage of this approach was clear as soon as the crypto crash of early November again.

Trust in FTX

Users were not in any way obliged to trust this digital currency exchange. Instead, they chose to do so even though the fine print showed many potential ways how the whole setup could come crashing down. Some would be quick to judge it as a clear and unmistakable sign of human greed once again placing people in danger of losing all of their funds. However, the interplay of the internal and external systems shows that this is simply not the case. People who use this token exchange did not believe themselves to be in a highly risky place. They were simply doing what so many others have been doing as well and there was no harm in that from their perspective.

But, the crash came nonetheless and so many are now wondering anxiously what will happen to their funds. The whole debacle of the FTX exchange left many in a state of anger and financial pain. There are many who are now swearing that the industry of crypto cannot allow this to happen again. But, chances are that precisely this will occur again and again. The notion is that the users and the developers have to use this case in direct practice. The FTX external system demanded some centralization and oversight. This did not have to undermine all of the decentralized aspects of the digital currency space but provided potent assurances in the worst-case scenario. The same was not in place and the damage is abundantly clear to everyone. The same should not happen to some other digital currency exchanges even though other issues will appear for certain sooner or later.

Source: Coindesk