After FTX, distrust is back at the center of the cryptoverse

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Artwork: Brendan Lynch/Axios

There is something a little oxymoronic about the idea of ​​a cryptocurrency company. In the wake of the FTX implosion, crypto is increasingly returning to its trustless roots in a world where corporations have a much smaller role to play.

Why it matters: The spectacular collapse of FTX and the impending prosecution of its disgraced founder, Sam Bankman-Fried, has undermined confidence in the institutional crypto ecosystem.

The result was a bifurcation: normal people want reassurance that they can trust the companies they deal with. Cryptocurrencies, on the other hand, simply prefer not to trust anyone. This, of course, carries its own risks.

The big picture: Crypto companies have raised over $85 billion from venture capitalists in recent years, per Galaxy Digital, of which about $1.8 billion has gone to FTX. The irony is that these investments were all based on a system of civil society contracts and institutions that true believers in crypto never trusted.

Now, crypto is flowing out of institutions, including Binance, the largest crypto exchange. This means it flows directly to individuals, who are increasingly choosing to take care of their own crypto wealth, rather than trusting a company to take care of it for them.

Flashback: Bitcoin was created in 2010 as an alternative to government-issued money, following a global financial crisis that shook trust in institutions.

Bitcoin is based on a “trustless protocol” blockchain where no one needs to know the identity of their counterparty in a transaction, and there is no credit or counterparty risk.

What happened: As the global economy recovered from the financial crisis of 200809 and crypto became more and more mainstream, a large number of companies were created to help individuals navigate the world of crypto.

By necessity, anyone dealing with these companies trusted them at some level. Part of the reason companies were trusted was that they were able to raise billions of dollars in venture capital, and clients felt that VCs had done their homework. This assumption now seems wrong.

Where we stand: Crypto companies are struggling to prove that they are trustworthy, which is not easy when no major auditors will work with them.

For many crypto investors, however, there is no need to trust auditors or work on elaborate Merkle Tree proofs, as long as they can return to a world of investing and trading where they don’t. need to trust no one, except perhaps themselves. . This is the promise of DeFi decentralized finance and “cold storage” solutions where coins are kept on physical devices that are not connected to the internet. These products are experiencing a surge in sales following the collapse of FTX.

The bottom line: Governments control the currency, so if you want to convert your US dollars to crypto, or vice versa, you’ll need to go through some sort of trusted and regulated institution.

Outside of these “on and off ramps,” however, it is entirely possible to navigate the cryptoverse without trusting anyone. This is bad news for companies in the sector.

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