Opinion: Blockchain technology should not be blamed for FTX’s collapse

Cryptography and blockchain are science

Cryptography is an ancient art for keeping information private. It has the strongest mathematical and scientific foundations among computer science subjects, and has a highly active (and supportive) peer review infrastructure. The discipline has dedicated researchers working to improve its core methods, and these researchers are open to discovering potential weaknesses in its scientific foundations. As a science and practice, it existed long before all the other "new" fields such as artificial intelligence, big data, the Internet, networks, etc.

As a discipline, cryptography can be well transformed from theory to practice, and it has now become the core of Internet security.

Without cryptography, we would have next to zero security online. So the magical “s” on “https” transformed our online world from one open to malicious activity to one that liberates us from those who want to steal or destroy our data. It essentially fixed a flaw in the design of the internet.

Blockchain is not hype

For blockchain, we also have a highly trusted infrastructure that uses Merkle Tree to define a high level of trust for all associated transactions. Cryptocurrency is the core user of blockchain - just like a car uses an engine, but the engine can be used for many other applications. Therefore, blockchain does not exist as a technology itself, but as an engine that drives other things.

It is a superficial reaction to dismiss blockchain technology outright. “Blockchain skeptics” are based on a lack of scientific method, and can be equated with 5G skeptics, or those who are skeptical of the rise of the internet.

In the process of blockchain development, some terms have been misinterpreted and generalized, and lost some meaning in the media. The scientific world of cryptography has become a binary world of likes and dislikes. I personally believe that cryptography and Merkle trees can build a more trustworthy world.

encryption

At one time, “crypto” was short for cryptography, but not anymore. The sale of the “crypto.com” domain underscores that the word is now primarily associated with “cryptocurrency.”

At its core, cryptocurrency is the art of public key cryptography and the use of blockchain infrastructure to create trust in transactions. It is peer-reviewed science, much of which was created in the 1970s and 1980s, and the technology has been evolving with scientific practice ever since. Blockchain can handle any transaction, including money transfers. Its potential may not yet be fully utilized. It is not a solution, just another tool in the toolbox.

Cryptocurrency does have the potential to create a more trustworthy infrastructure for transactions, but there are also some people who have hijacked cryptocurrencies in pursuit of bad financial models. The main method is to use the currency owned by the company to support the value of the company. Moreover, another core problem of cryptocurrency is the general lack of regulation and lack of transparency in the industry.

So if we create cryptocurrencies, we naturally need a way to trade them, where customers can create wallets and then sell their assets using their private keys and receive cryptocurrencies through their public keys. This is when the exchange becomes a trading floor where people can buy and sell. It is no different than a trading floor where stocks are bought and sold, where the laws of supply and demand determine the price. However, the exchange must have a way to guarantee the value of the transactions it holds and have enough reserves to allow them to trade normally in difficult situations.

Fraud is just fraud

Fraud is just fraud, no matter what currency it is in. It was not auditors or regulators who discovered the potential fraud of FTX, but CoinDesk. They found that FTX was mainly associated with Alameda Research, which held most of its assets in FTX's native token (FTT).

Alameda reportedly has $14.6 billion in assets, but most of that is tied up in FTT tokens. This is a circular finance model.

Binance considered acquiring FTX, but due to concerns about the risks that FTT might bring, they decided to sell their investment in the company. The run on FTT caused FTX to file for bankruptcy on November 11, 2022.

I cannot understand this business model of using company-generated tokens to back company assets. This is clearly a Ponzi scheme.

Who is to blame for this?

I think both sides should be punished. First, we don't see any supervision in it, and second, we don't see the disclosure of the funds and assets that support the operation of the exchange.

I'm not an economist, but I know that banks need reserves. These reserves must be real, relatively liquid, and able to cover most withdrawals from customers. For example, in the UK, Northern Rock suffered a run:

It was a scary time for many customers, but the bank overcame the difficulties and was later acquired by Virgin Money. Whether we like it or not, no bank can resist a run on its deposits and banks must have sufficient reserves to ensure that their value can be balanced against a trustworthy valuation.

Transferring assets to avoid audits

One must also worry that auditors and regulators lack the skills to properly audit such companies, as there are rumors that cryptocurrencies are moving between companies. Auditors can consider these transfers as part of the company's assets and then remove them from the company after the audit is over.

in conclusion

Fundamentally, this is not the fault of cryptocurrencies. Using crypto tokens is undoubtedly a better way to perform financial transactions between one verified entity and another.

With crypto technology nearly certain, the dream of creating peer-to-peer money transfers remains. However, cryptocurrency is a nascent industry that needs to gain the trust of users.

The dream of creating a more trustworthy, auditable, and transparent financial world is still there; it’s just that some people have used it to create failed financial models.

Strengthen supervision and auditing?

We need better regulation of the industry and ensuring that healthy companies are developed that can build a new economy and move away from paper-based transfers. So everyone needs to wake up and accept that crypto tokens have a role to play and that we need to better match these tokens with our existing financial world.

I personally think we can use cryptography and Merkle trees to build a more trustworthy world. In the trustworthy financial sector, regulators and auditors need to understand these situations better and be able to detect any potential fraud and risks.

Because, they protect our money, our investments, and our future. My understanding of finance may be oversimplified, but it seems reasonable to me to value a business by something that is stable, and the ability to convert its asset base into cash seems to be simple economics.