It’s Time to Get Back to the Roots of Cryptos Don’t Trust, Verify

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After exchanging heated tweets during a public feud with Binance CEO Changpeng Zhao, FTX CEO Sam Bankman-Fried confirmed the crypto industry’s worst fears on November 11, 2022, announcing a Chapter 11 bankruptcy filing for FTX International, FTX US and Alameda Research.

To make matters worse, the estimated $6 billion liquidity gap that prompted the filing was largely the product of less-than-ethical trading by SBFs leveraging client deposits on its regulated CEX (centralized exchange). to fund high-risk transactions on behalf of his cohorts at Alameda.

The multi-billion dollar collapse has left much of the crypto space in shambles, with big industry players across the space especially recently, Genesis Trading and BlockFi announcing daily their exposure to the FTX contagion- Alameda.

Retail investors have also seen their confidence betrayed as their foreign currency deposits are now at stake.

Indeed, FTX’s foul play and ensuing death spiral did not come without valuable, albeit costly, lessons. November’s market woes served the entire crypto community as an emphatic reminder to let its fundamentals go astray in the pursuit of profits will not produce meaningful progress, especially in the long run.

Here’s the big takeaway, nothing is trustless or decentralized unless it works on-chain, where transparency reigns paramount, and reserves, AUMs (assets under management) and community governance votes can be monitored and confirmed in real time.

In retrospect, it was inevitable

There is no greater clarity than that provided by hindsight. Nonetheless, in an industry where the long-term viability of consensus PoS (proof-of-stake) has been debated relentlessly in the run-up to the Ethereum merger, it’s almost inconceivable that mass market platforms with governance models Opaque, off-chain reservations and near-zero community involvement have generated unparalleled brand recognition and multi-billion dollar customer deposits.

While the largest to date, FTX’s unreasonable insolvency is just the latest in a year-long string of CeFi (centralized finance) bankruptcies that have included centralized industry giants 3 Arrows. Capital, Voyager Digital and Celsius Network.

The fact that we even find ourselves in a situation where long-standing CEXs like Binance are releasing proof of on-chain reserves to the public for the first time is a sign that as a collective, we in the crypto community have really lost the thread.

If ever there was a time (and opportunity) for a drastic recalibration of some sort, it’s now.

Don’t Trust Verification

Fortunately, SBF’s billion-dollar mass-market betrayal offers plenty of wisdom to glean. All in all, objective verification must remain a prerequisite or, even better, a substitute for trust.

In other words, when verification cannot be performed, trust cannot be granted. In three words, don’t trust verification.

This is the crucial axiom that crypto should have internalized long ago, and it will continue to resurface with interest whenever it is overlooked.

This is the quintessential value proposition of public-key cryptography and associated cryptographic evidence that powers decentralized ecosystems and empowers their users. More importantly, we need to internalize that there is no substitute for on-chain verification, as it encompasses every use case cryptocurrency has to offer.

Cryptos Value Proposition Revisited

Money, finance, unique artworks and even privacy tools already exist yes, audio files and video clips too. Cryptos decentralized ecosystems bring nothing to the world that does not already exist.

They simply present a universal infrastructure and set of rules that level the playing field and remove the need to entrust superpowers to opaque, centralized entities. The long-term benefits of decentralized systems are certainly profound, but the path to realizing them is incremental, systemic, and unsexy.

It is the great gift and the curse of decentralized systems that their powers are only as strong as the discernment of their users.

Bringing your cryptocurrency to CeFi for returns is like taking your spouse to McDonalds for prime cuts, at best you’re buying a pledge in name only, and one with red flags galore. Worse still, if you drag on too long, it’s only a matter of time before you suffer untenable consequences.

Decentralization in black and white

Unless decentralized systems free users from forced dependence on centralized entities and third parties, they serve no purpose.

Bitcoin provides decentralized money. Ethereum provides decentralized financial tools. Monero enables decentralized private transactions. Without decentralization, there is no added value for society as a whole.

CeFi and CEX are just legacy financial institutions that have adapted their business models to support native digital assets and have required their marketing departments to assimilate the Web 3.0 lexicon.

Their reserve management and risk appetite are not beholden to on-chain code or community governance. Most importantly, they are not eligible for the rescue intervention and support traditionally provided by central banks.

Imagine Citibank over-leveraged client funds in the 2007 subprime debt market without access to the Federal Reserve printing press. There would be only one inevitable result: insolvency and dissolution.

A call to action to clarify our priorities

In the current state of blockchain-based ecosystems, performance remains the biggest barrier to adoption, and that’s okay. It is simply the cost of decentralization in 2022.

Compromising on the technical, financial or other components that are responsible for decentralization renders our ecosystems identical to the imbalanced and exploitative legacy financial system we designed to replace them.

For those of us who see the big picture, it is our responsibility to temper our desire for mainstream media penetration and adoption with an unwavering commitment to decentralization to replace trust with verification.

If we succeed in this prerogative, there are no limits to the creative ingenuity and innovation that this space is capable of producing.

Perhaps optimistically, I argue that it is no exaggeration that a renewed commitment to the founding principles of crypto can lead us to some kind of renaissance in the years to come. FTX’s exposure might just be the wake-up call the crypto community needed to realign itself with its original mission.

Alex Shipp is the Chief Strategy Officer at Offshift, where he contributes to the tokenomics platform, produces content and leads business development on behalf of the project. In addition to his role in the industry as an expert in PriFi (private decentralized finance), he has also served as a writer at the Elastos Foundation and as an elected ecosystem representative at the DAO Cyber ​​Republic.

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Featured image: Shutterstock/art prodigital/Natalia Siiatovskaia

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