Drawing a straight line from Mt. Gox to Voyager Digital, Celsius Network and now FTX shows how crypto’s largest problems are often corporate failures.
When we look back at November 2022, we may well view it as the end of the “Centralization Era” in crypto.
Centralized crypto exchanges offered consumers an appealingly convenient way to invest in crypto. However, the centralization era also led to disregard for consumer protection and massive meltdowns that have affected tens of millions of people and hundreds of billions in assets.
Consumers are learning very hard lessons about the risks of centralization. You can draw a straight historical line from Mt. Gox to Voyager Digital, Celsius Network and now FTX. The inevitable conclusion is that centralized entities pose a systemic risk to the crypto ecosystem. It is well past time that we as a collective crypto community come together to demand better.
Crypto was founded upon the idea of true individual ownership and self-sovereignty as a response to the 2008 financial crisis. It was built to be different, where individuals held the keys to their own wallets and could trade without an intermediary.
The animating vision since Bitcoin’s creation has been to enable all of us to take back control of our money. There is a longstanding truism that “power corrupts,” which holds for financial history, too: If you give someone control over your money, they’re bound to abuse your trust. This plays out in crypto between self-custody and centralized custodians.
It’s time we returned to the roots of crypto that brought us all together in the first place.
At Ethos.io, we have long been proponents of decentralization and self-custody. In 2017, we designed a decentralized crypto wallet that garnered over 100,000 users, and were then tapped to help build the payment and blockchain rails for Voyager, a centralized crypto broker which scaled to a million users.
In time, we left Voyager because of cultural differences – the management insisted on a centralized path to build up their AUM [assets under management]. Ultimately these funds were lent out to Three Arrows Capital, leading to a swift Voyager bankruptcy.
Unfortunately, both Voyager’s and FTX’s users have learned the hard way that crypto held in accounts on those platforms are not “theirs” – far from it. Centralized exchanges and brokers often co-mingle funds into omnibus wallets, and treat their customers as “unsecured creditors.” Voyager depositors have watched management, employees, lawyers and bankers all consume company capital resources while their crypto remains locked up in the bankruptcy process.
It is mind-boggling how often just one person’s actions can impact the fortunes of millions. This is the exact opposite of how crypto is supposed to work and why the centralization era has been so risky. This era must come to an end.
The era of decentralization is the only viable path forward. Crypto must return to its roots and take back power from corrupt institutions that have abused their power and influence.
The last five years have seen several technical breakthroughs that can serve as a foundation for a robust, safe and fair decentralized economy. Decentralized trading platforms promise huge benefits over centralization: lack of counter-party risk, on-chain settlement and transparency. It is simply impossible to trade against your customers.
A properly implemented and maintained decentralized finance (DeFi) economy will service the interest of both customers and operators, not to mention provide encoded consumer protections which regulators are trying to achieve.
Work must still be done. Vitilak Buterin, co-creator of Ethereum, has written eloquently on the need for secure vaults to minimize the risk of losing your keys. Multi-party cryptography (MPC), layered security and social guardians can make this a reality and leave the days of mnemonics and seed phrases behind.
We are once again at an inflection point where we as a community must defy centralization. We must defy corrupt CEOs who seek to separate us from our money. We must defy corporate secrecy, which has enabled corruption and recklessness paid on the customers’ dime. We must want to return to crypto’s roots and empower individuals to wrest control of what is rightfully theirs.
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