DeFi Can Solve The FTX Crisis, But It Needs Better Communication.

Delfrina Yasmine . November 22, 2022

Picture: FinancialTimes

Techspace - The events of the last two weeks have been particularly distressing for those of us working in decentralized finance (DeFi). Unintentional users suffered an injury and, in some cases, lost all of their savings. Court papers and leaked documents reveal the extent of fraud, carelessness, and wrongdoing at FTX, and the crisis has already damaged the trustworthiness of our entire ecosystem.

It's a bitterly ironic turn of events, given that DeFi's vision is a financial system in which what happened at FTX is unlikely and impossible.

The general public is unaware that the misuse of user funds at FTX—where FTX allegedly secretly transferred user funds to Alameda Research—would be impossible with a proper on-chain decentralized protocol. Such opacity would be impossible on an open, immutable blockchain, where FTX appears to have concealed its insolvency through creative accounting. It would be impossible for an actual permissionless DeFi protocol to discriminate against users like FTX did last week when the exchange transacted with Bahamian residents as it was collapsing. And, perhaps most importantly, where FTX users face the possibility of total fund loss, such a disaster would be unthinkable for users of a self-custodied DeFi protocol.

However, this does not imply that DeFi in its current iteration is without flaws. The potential danger associated with smart contracts, gaps in technical understanding, and delayed movement caused by decentralized organizations are all drawbacks. During this time, a few regulated and centralized entities have proven that they can become valued and reliable partners to the decentralized finance industry.

The most dangerous condition, then, is not totally decentralized organizations nor fully centralized ones; instead, it is organizations that masquerade as DeFi while succumbing to the very tendencies that DeFi is supposed to address. This is the most poisonous situation.

As a result, we must communicate the distinction between DeFi and centralized finance. Although the DeFi community knows FTX was not a DeFi project, most new users, mainstream media, regulators, and politicians are unaware of the distinction.

As a result, we must communicate the distinction between DeFi and centralized finance. Although the DeFi community knows FTX was not a DeFi project, most new users, mainstream media, regulators, and politicians are unaware of the distinction.

We must emphasize that FTX failures are unlikely to occur in true DeFi and impossible due to DeFi's immutable, decentralized, transparent, and permissionless nature.

In addition to this, we need to broaden the availability of DeFi. The failure of FTX.com could affect as many as one million users, many of whom utilized the platform because of how straightforward it was. It is up to us to develop decentralized applications (dApps), wallets, and teaching materials that will make it simple and risk-free for these individuals to join the DeFi network.

Many people in our community are already discussing this topic on Twitter and in crypto-related media. However, we need to step up our efforts.

Beyond Crypto Twitter, we need to connect as we face the possibility of regulatory intrusions, investors who refuse to cooperate, and customers who have been traumatized. Traditional media, regulators, institutional partners, and retail customers must be contacted, as do institutional partners. We must make it crystal apparent that the solution we are developing is the solution not only to the unethical practices at FTX but also to the more significant problem of consumer exploitation, financial fraud, and exclusion.

This is a difficult time for everyone who cares about DeFi, but it also allows us to clarify who we are and what we stand for in this world. DeFi must be comprehended and judged only based on its own merits. If we are found guilty of the crimes of centralized finance, then it is because we did not differentiate our job and effectively express the significance of what we did. Nothing less than the existence of DeFi itself is on the line here.

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