FTX Saga: Lessons We Knew But We Didn’t Learn

Important Takeaway

  • The collapse of the Sam Bankman-Fried empire has shocked the cryptocurrency industry – and set it back for years.
  • The industry has shrugged off a lot of red flags, allowing Pinkman-Fried to rise to the top.
  • The FTX catastrophe could have been avoided if the cryptography stuck to its core principles: don’t trust, verify; And always store your assets yourself.

After Do Kwon, Three Arrows Capital, and Alex Mashinsky set the standard for crypto egregious error this year, the incredible fall of Sam Bankman-Fried recalled one of the internet’s most popular memes: “Catch my beer.”

This week the SBF was revealed, as isKnown in crypto circles, it blew a $10 billion hole in the balance sheet of one of the largest and most trusted central cryptocurrency exchange, FTX. It will be months before the dust settles and the full extent of the damage becomes clear.

However, the lessons this industry will have to learn to get out of this crisis will be the same as it has always advocated. Rule 1: Neither your keys nor your coins; And Rule 2: Don’t trust, check.

Trusted third parties are vulnerabilities

Nearly 14 years after Satoshi Nakamoto published the Bitcoin White Paper, they outlined a blueprint for “a pure version of peer-to-peer electronic cash that would allow online payments to be sent directly from one end to another without going through a financial institution.” Their trading volume is on central exchanges, that is, financial institutions.

Satoshi has clearly stated his motivations for creating Bitcoin, saying that they want to get rid of the financial system’s dependence on third parties. And while whoever was behind the nickname Satoshi was a genius, this idea wasn’t theirs. In 2001, Nick Szabo, the godfather of smart contracts, published a blog post titled “Trusted Third Parties Are Security Holes.” In it, he described the risks of building systems that depend on trusted third parties and the fundamental need to build systems that do not rely on them.

Then Satoshi came along and created a replacement; Bitcoin customers — especially those who like to hate “those who love annoying toxic cryptocurrencies” — intuitively understood the basic idea, stuck with it, and predicted it to the masses. The phrase “not your keys, not your coins” has become a mantra for the space, which aims to highlight the need to store cryptocurrencies rather than relying on central intermediaries. However, many ignore this advice. Despite several warnings, including the Mt.Gox and QuadrigaCX explosions in 2014 and 2019, the fortunes of thousands of crypto enthusiasts, including some industry veterans, have been wiped out because they used centralized crypto exchanges or lending platforms.

Not only have people chosen not to “verify,” but they also blindly trust companies that are completely opaque and inherently risky. Billions of dollars were thrown into black boxes and taken care of by cocky self-serving people, while the industry shut down and did nothing. Then we were shocked when the dangers unfolded –As if Satoshi hadn’t clearly put it in the white paper.

The worst thing about the FTX crisis is that the red flags were visible the whole time.

Red flags about FTX

Sam Bankman-Fried made his name in crypto after founding FTX in 2019. Quickly becoming an industry figure and a popular media man without showing any evidence of past proficiency work, he became the richest in the world under the age of 30 when FTX reached $32 billion in 2022. Bankman-Fried became known for his obsessive personality and plans to give away his fortune Awe-inspiring through effective altruism – the wealth from which he has earned Hypium looking to rent and wholesale to venture capitalists who have resold it to crypto tourists looking to make money flipping the latest bustling coins in the market.

The predatory nature of Alameda Research, the Bankman-Fried trading company he founded in 2017, is no secret to the industry. The company planted dozens of promising DeFi projects on the board and then dumped them into oblivion, in many cases causing irreparable damage to private investors and the projects themselves. Bankman-Fried has also become a staunch supporter of Solana – a Layer 1 network whose total value has been greatly inflated by two brothers impersonating a team of DeFi developers. Solana has collapsed multiple times since it erupted in 2021 and its ecosystem has taken a huge hit due to the collapse of FTX.

Bankman-Fried has spent this year sticking his face on billboards advertising FTX, mingling with politicians and regulators, and lobbying for the Digital Goods Consumer Protection Act (DCCPA) that, if passed, would effectively kill decentralized finance. In other words, he made his way to the top and then tried to pull the ladder underneath to sabotage the others.

Bankman-Fried oversaw FTX, while Alameda Research was led by Carolyn Ellison, 28, with only 19 months of experience as a junior trader on Jane Street. In 2021, she sparked controversy when she was open On Twitter she used amphetamines. “Nothing like regular use of amphetamines to make you realize how stupid a lot of non-therapeutic natural human experiments are,” she wrote. Fast forward a year, and Ellison finds himself at the epicenter of the FTX scandal after it emerged that Bankman-Fried had moved about $10 billion in FTX client money to help the company weather a bankruptcy crisis.

While there have likely been many hoaxes going on behind closed doors, some of which may appear and others we may never know, the red flags with Bankman-Fried and Ellison were there for all to see. However, very few did it – and no one expected the couple’s deceptive antics. We got caught up in their game even though we’ve seen several similar episodes of the same series this year.

Unfortunately, there are still many red flags in the industry.

We never learn

Last week’s events in crypto are nothing new. History is full of abuses of trust, money and power. That is why Satoshi invented Bitcoin – to create a sound monetary system that eliminates the need for trust and cannot be abused. But it seems we can’t help ourselves. Closing monologue by Jeremy Irons in the movie marginal calls It sums it up perfectly:

“It’s just money; it’s made up. Pieces of paper with pictures on them, so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s really no different today than it ever was. 1,637, 1,” 797, 1,819, 37, 57, 84, 1,901, 07, 29, 1,937, 1,974, 1,987 – Jesus, It Wasn’t Good For Me – 92, 97, 2000 Whatever We Want Call it. It’s the same thing over and over again; we can’t help ourselves.”

Change the years of financial crises with cryptocurrency explosions, that is, Mt. Gox, QuadrigaCX, Voyager Digital, Celsius, FTX, BlockFi, and the parallels are clear. It’s just the same cycle repeating itself. It seems we never learn.

In some strange cosmic paradox, the cryptocurrency industry has completed, cherry-picked and reproduced the worst aspects of the traditional financial world it had originally sought to overthrow. Reliance on trusted third parties, shady off-chain deals, excessive, unsecured borrowing for undiluted risk – we’ve all done and done without apology, in typical cypherpunk fashion. Only this time, the government and the endless central bank balance sheet will not be there to cushion the blow, privatize profits and socialize losses, as has been the tradition in the real world for some time.

And for nocoiners who are nervous and ready to scream, We told you so”- relax. It didn’t happen because Encryption is a scam, or so The encryption is unstructured. FTX was a company subject to regulation under the entire laws and regulations of the same offshore jurisdictions that politicians who tout such nonsensical phrases exploit to disguise their fortunes. In other words, a regulated company did an illegal act without the regulators getting caught red-handed. What a shock, isn’t it?

We did it royally this time, not because our goals were unworthy, but because we failed to learn the lessons we already knew: Don’t ignore the red flags. Do not trust, check; And always store your assets yourself.

Disclosure: At the time of writing, the author of this feature is holding ETH and many other cryptocurrencies.

FTX Saga: Lessons We Knew But Didn’t Learn – Coinphony [SV]

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