FTX drama and DeFi as beneficiary

FTX is currently in the media and is being compared to Lehman Brothers and the 2008/2009 financial crisis. In the crypto market, however, there is one important difference: no central bank to bail out the market. So, the market has to regulate itself and that’s exactly what happens with DeFi. A market shakeout is taking place, which will be the basis for future growth.

Author: André Pager, Jennifer Pager

A short recap

Everywhere we read it in bold print: FTX. The black sheep, the “unword” of the whole blockchain environment in 2022.

It happened so fast, just with a blink of an eye.

It all started on November 2, 2022, when the CoinDesk report showed us, that Alameda Research (trading firm associated with FTX) had a large percentage of its assets in illiquid assets, especially in the FTX token FTT.

The resulting uncertainty was further fueled by the tweet from Binance CEO Changpeng Zhao (aka CZ) to liquidate its FTT position of over $2 billion. Due to the falling price and the first announced potential, then withdrawn acquisition of FTX by Binance, FTX declared bankruptcy only 9 days later. If you take all the information together, this is not a technology failure, but a classic case of worst mismanagement or even fraud revolving around Sam Bankman-Fried, who has recently been arrested by Bahamian authorities. Analyses show that FTX had

  • no central cash management system,
  • no audited financial statements for Alameda.

Once again, this case shows what can happen in a system that is centrally controlled by not trustworthy people, also in the blockchain environment.

As convinced crypto investors and experts in blockchain technology, we nevertheless see light at the end of the tunnel in this misery, even though this incident will have an extreme impact on the entire CeFi (Centralized Finance) sector.

Types of existing financial systems

The collapse of CeFi platforms that are neither transparent nor trustworthy was and will be terrible for investors. It is in blockchain technology, in particular, that we place our hopes for inclusion, fair collaboration and transparency. We build on trust, and for us, this is the central theme of blockchain technology — no third parties involved, no fraud possible through immutable cryptographic mechanisms. Therefore, we are convinced of DeFi (Decentralized Finance).

But what is the difference between TradFi, CeFi and DeFi?

Figure 1: Types of existing financial systems

01 | TradFi:

  • Completely regulated financial institutions in traditional financial market.
  • Regulated banks, brokerage firms, insurance companies, hedge funds, etc.
  • Transparency according to financial regulations.

02 | CeFi:

  • Centralized financial organizations linked to traditional financial and crypto market.
  • Regulated (depending on jurisdiction) companies, e.g., Binance, Coinbase, Crypto.com with transparency according to financial regulations or
  • Non- or not proper-regulated organizations, hedge funds, etc. (e.g., Celsius, FTX) with no or insufficient transparency.

03 | DeFi:

  • Decentralized financial activities (peer-to-peer) based on blockchain technology.
  • Rules determined by code of applications running on blockchain.
  • Documentation and full transparency of transactions on blockchain.

Only in DeFi you can find full transparency, decentralization and trust without the need for a third party — exactly what blockchain technology is about for us.

What are the possible positive effects?

In the long run, DeFi will benefit from this whole FTX misery for 3 reasons:

1 | Since the collapse, significant amounts of crypto have been transferred from centralized exchanges to private wallets and the use of DeFi platforms has increased significantly.

According to The Defiant, “this surge in DeFi comes after FTX morphed from crypto ambassador to bankrupt embarrassment in little more than a week. The moment may prove pivotal for the crypto industry but not in the ways outsiders think.” Self-Custody and DeFi gained traction directly after the FTX debacle.

2 | The disappearance of current major centralized exchanges whose primary purpose is to provide easy access for users into the crypto space creates a vacuum. Indeed, these exchanges generated significant profits for their owners. This vacuum could be filled by regulated private institutions, such as major banks, which were already working on similar projects, to enter the market.

3 | The basis for these private institutions will be regulations. As JPMorgan Chase noted, the news surrounding FTX can be considered “as one step back, but one that could prove to be the catalyst to move the crypto economy two steps forward (further unlocking the utility value of blockchain). In fact, we see the establishment of a regulatory framework as the needed catalyst to massively ramp the institutional adoption of crypto.”

A future scenario for DeFi

The collapse of FTX, amongst others in the CeFi sector, creates a gap that could be closed by established financial companies. Institutions such as Fidelity or JPMorgan Chase have already been dealing with the crypto market for some time and have created corresponding conditions to step into this business.

Thus, the established TradFi companies could take the place of the current CeFi companies by taking over some of them or start cooperations with the remaining ones. Therefore, these established traditional financial institutions would bridge the gap between fiat and crypto in the future. As they are trusted companies, the majority of people who are not yet invested via unregulated offshore exchanges, will then have the possibility to do so in the future.

This will accelerate crypto adoption and therefore increase the amount of money invested in the crypto market. Finally, these financial institutions will use DeFi applications to ensure own efficient operations. This will be hugely beneficial for the whole DeFi sector and will herald a new era in the blockchain environment.

Originally posted by LOCKCHAIN on 11/27/2022

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 internationally associated founding members from various interest groups. In order to increase transparency and safety in global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 10000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.