The events surrounding the FTX exchange this week triggered panic selling in the markets, resulting in new lows in major crypto assets.Bitcoin BTC fell to a low of $16,890, the lowest level since November 2020.Ethereum ETH dropped to $1,140, a low last seen in July.FTT, the native token of the FTX exchange, crashed 90% in what appears to be a panic selling and a path similar to Terra LUNA3 Luna’s crash in May.
The chain of events began with the leak of Alameda Research’s balance sheet, which revealed that it held billions of dollars in collateral in FTX’s native token, FTT.Investors speculated that the FTT token was inadequately liquid to cover the debt.The first shockwave occurred on Sunday evening, when Binance CEO Changpeng Zhao (CZ) tweeted that he wants to sell Binance’s FTT holding, which was valued at an estimated $580 million at the time.
This resulted in a bank run on FTX, panic selling of FTT tokens, wild short-selling speculation trades, and, ultimately, the announcement that CZ would acquire FTX.
At the time of writing, the prevailing news is that Binance may withdraw from the deal after reviewing FTX’s books, and that US financial markets regulators are investigating whether FTX properly handled client deposits.
This comes after a series of events in the crypto space that have lowered confidence in investing in and trading digital assets.Three Arrows Capital, Celsius CEL , and Voyager Digital all went bankrupt this year.
With the ongoing collapse of FTX, the third largest crypto exchange, it is clear that something is wrong with exchanges and that the space requires fundamental change to restore investor confidence and security.
One of the most difficult issues with crypto exchanges is the lack of transparency, as the majority of them allow traders to trade on I-owe-you (IOU) balances, saving onchain costs.They have been observed pooling client deposits, thereby creating a honeypot that hackers frequently target.Furthermore, they frequently rehypothecate client funds, putting client deposits at risk.
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CZ announced on Tuesday that Binance, the world’s largest crypto exchange, will begin doing proof of reserves soon via a Merkle chain.This means that all crypto traders on the exchange will be able to verify that the exchange has reserves that match client deposits one-to-one.
This will increase transparency and help to rebuild trust in the cryptocurrency space.
If all exchanges were to follow suit and provide proof of reserves via a merkle chain, it would rebuild trust in the space and make exchanges a better environment for traders.
While this does not solve the honeypot problem, it is a step in the right direction, in my opinion.Exchanges play an important role in the ecosystem.They assist traders in on-ramping and off-ramping funds from fiat to cryptocurrency and vice versa.They also provide liquidity, which allows for the smooth exchange of cryptocurrencies with other cryptocurrencies.
In addition, exchanges provide a borderless flow of capital where cryptocurrency users can borrow against their holdings at globally competitive rates.
To eliminate counterparty risk, self-custody of one’s own Bitcoin is still the best bet for any pleb.
One of the reasons Satoshi Nakamoto developed Bitcoin was to eliminate the system of trust and base peer-to-peer transactions on cryptographic proof.
While Bitcoin addresses the age-old issue of money, I believe cryptocurrencies have spurred more innovation in the form of global companies with instant global reach.Previously, it was difficult to run a global company with a seamless flow of capital and payments due to various jurisdictions.
Disclosure: I own bitcoin and other cryptocurrencies.
Rufas Kamau.
