FTX Proves why we Need DeFi

Paul Faecks
December 12, 2022
5 min read

As most have likely heard, FTX declared bankruptcy last week. Alloy and our clients are not impacted by this, our heart goes out to everyone who is. We would like to elaborate our stance on the matter as well as underline how Alloy is built to ensure transparency and security. 

FTX has a multi-billion dollar hole and was at the very least negligent (probably fraudulent) in commingling assets with Alameda (and very likely worse). It fills us with genuine sadness to see fraud of this scale.

While FTX’s bankruptcy negatively impacts the perception of the entire space, we view FTX’s apparent fraud as a case study of traditional finance at its worst. It is important to call FTX’s leadership what they are: criminals. 

As Jason Choi Points out:

FTX was an opportunistic and opaque exchange that actively lobbied against the fundamental ideals of DeFi, and stole billions in user deposits while committing fraud in broad daylight up to the last day of its bankruptcy.

Unfortunately, just as excessive opportunism is a byproduct of crypto, so too are those who use the fallout of said excess as justification for why the entire space is invalid. Saying the fall of FTX spells doom for crypto is the same as saying global attempts to improve healthcare and diagnostics should stop because of Elizabeth Holmes.

Users of FTX can hope to recover some of their assets through the bankruptcy proceedings but looking at similar processes, this likely takes years, and considering FTX’s assets and liabilities, recovery values will likely be grim. 

The bankruptcy proceedings were followed by calls for more restrictive regulation. It is important to note that FTX was domiciled in the Bahamas. The EU, and Germany specifically, have an extremely robust framework for regulating financial institutions dealing in digital assets, especially concerning custody of assets. This is why we have chosen to follow strict BaFin rules and build an infrastructure that adheres to some of the highest regulatory and security standards in the entire industry. 

The silver lining is that this underscores the need for regulated and transparent access to crypto and DeFi. It also illustrates, quite painfully, the problems with pure centralization and the need for native access to DeFi. Through everything, DeFi protocols worked seamlessly, with billions flowing through AAVE, Lido, Curve, Uniswap, etc..

This would have been impossible with transparent proof of reserves and transparency around how and where funds are held. 

We made that decision at Alloy very consciously to focus on not only being regulated but also always having full transparency for every single user to independently verify their funds on-chain at all times.