The last week in crypto and web3 has been hectic with the unexpected crash of FTX and its token, FTT.
It's moments like these that define this space throughout the past few years — coins that have fallen like UST, exchanges that have been hacked like Mt. Gox, and many more.
It's in these moments that we learn the most true lessons about the present state of crypto and the most important insights about this space's future.
I'll write and reflect on a couple of those insights below.
1. Future of Centralized Exchanges and a Rise of Decentralized Exchanges
How do we prevent future events like what we've seen with FTX this week? There have been a few proposed solutions:
- Increased regulation, both in the U.S. and offshore
- Proof-of-reserves mechanisms to prove customer funds are safe
- A move towards decentralized exchanges
I believe #3 is the most reliable long-term solution, although #1 and #2 will certainly play a role in the short- to medium-term here.
Cryptocurrency is fundamentally built on permissionless trust: the idea that decentralized technology — not humans; not regulation; not some code running on a single server — gives us trust in the system by default.
A decentralized system naturally removes any and all risk of apps and services causing issues that aren't completely transparent since everything is on-chain.
Thus, we need to move forward towards more decentralization here. We can do this both by removing centralized entities from the equation and adding more decentralized entities.
Long Term Solution: DeFi + Stablecoin Providers
The unique feature of a centralized crypto exchange is not actually holding and sending crypto (that's easy, just use a wallet), and it's not trading from crypto<>crypto (that's easy, just use Uniswap or dYdX) — it's trading from fiat<>crypto, and the onramp and offramp of that fiat money.
Indeed, what decentralized exchanges like Uniswap cannot do is convert USD directly to ETH or the like.
The solution, I believe, is simple: take advantage of the stablecoin providers as an on- and off-ramp provider. Take Circle, for example, who runs USDC, one of the most popular USD-based stablecoins.
Suppose they run their own public exchange, where anyone can buy and sell between USD<>USDC. Then, if I want to trade BTC or ETH or anything else, I just onramp to USDC through Circle, who is a regulated U.S.-based company, store all that USDC in my own wallet (my keys = my coins), and trade on a decentralized exchange that's completely transparent.
Previously, centralized exchanges handled all of: custody, keys, sending, receiving, trading, onramping, and offramping crypto.
Now, the centralized entity in the equation only handles onramp and offramp. That centralized entity should be regulated, and it's not unreasonable to suggest that it should be partnered directly with the government/economy of which its stablecoin is based.
For example, Circle partnering with the U.S. Treasury department to make USDC a more backed currency would be massively useful.
Long-term, it's hard to believe that centralized exchanges — at least as we know them today — can remain such a dominant player in a new decentralized financial system.
2. Focus on Crypto-Enabled Products, Not Crypto Products
Crypto is going to go through a dark phase throughout the next couple years, because of the recent crashes, the current macroeconomic environment, and just the natural cycle of bull and bear markets in crypto.
Crypto keeps on going through cycles. Why? Becuase crypto is naturally reputational — it's largely based on speculation, belief, philosophy, and sometimes politics. So, the biggest risk in crypto right now is reputational — if crypto gets hit by bad PR or bad prices.
What crypto needs now is real-world products, real-world value creation, powered by crypto — not crypto-based itself. That pushes the risk onto the quality and value of the products that are powered by crypto, not crypto itself.
The vast majority of major products in crypto today are depending upon hype cycles in crypto itself. The exchanges are a great example — the headlines of these products are "buy and sell 100+ cryptocurrencies," just as the headlines of NFT marketplaces are simply "the largest NFT marketplace."
We need to flip the script and start building products whose "why now?" is that they're newly enabled by crypto.
We need to start seeing products with headlines like "get universal shopping rewards" (happens to be powered by rewards tokens), "buy and sell fractional real estate" (happens to be powered by tokenized real estate), and so on.
3. Shift Towards Web3
Despite the crash and dropped reputation of crypto, big companies and brands still want to get into crypto.
The easiest way to get into crypto for brands and companies is through web3, often with NFTs, product tokenization, and token-based loyalty programs.
Decentralized finance is great, but it's limited in its market size. Web3 has the opportunity to reinvent and truly compete with some of the top web properties today.
... and that's all. Thanks for scrolling.