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Blood in the Markets: The One Lesson We Most Need to Learn From the Collapse of FTX

By Bayrd | CryptoBasics | 10 Nov 2022


Over the last few days, the Crypto-Space has been severally impacted by the serious issues surrounding the popular exchange, FTX. FTX was, only a few days ago, the second largest Crypto exchange, and the sudden collapse of FTX has single-handedly set the entire Crypto-space back in terms of progress and trust. In the current Crypto-Winter, this is a development that has shocked and shaken the entire Blockchain space.

Before anything else, my deepest condolences to anyone who has been impacted by this event. When things like this happen, it is a terrible reflection on the entire Web3 Space, but particularly damaging to those that get caught in the eye of the storm.

While we are still learning the details about what, exactly, happened, there are important lessons that we need to take to heart. What we do know, so far, is that it seems that FTX was using customer funds to prop up their related firm, Alameda.

And that is immediately related to one of the biggest issues in Crypto, Centralization vs. Decentralization.

In our modern, financially integrated world, we are used to centralized institutions managing how we store and use our financial assets. This builds a kind of complacency and an expectation of certain safety nets. It leads to a mentality of “Why should I take precautions to protect my credit card information? I am not responsible for unauthorized purchases,” or “If I get scammed, I’ll just dispute it and get my money back, so this activity is worth the risk.”

In a decentralized system, the responsibility for safety and security stays with the owner of the funds. Crypto, by design, is a decentralized system, but Crypto exchanges exist to house customer funds and act as intermediaries, creating centralization within the system.

There is a popular euphemism in Crypto that goes: “Not your keys, not your Crypto.” And with a Crpto exchange, the exchange manages and holds the keys of ownership to the underlying crypto. Ostensibly, this is for the protection of the customer who owns the funds; they don’t have to manage or store their keys of be concerned about safety and security.

But, back to the adage, the exchange holds the keys, and that make the crypto exchange, on the Blockchain, the actual owner of the cryptocurrency. You don’t have the keys, it is not your crypto.

But, but, but… you may be arguing. The funds are clearly mine! A company can’t just take them, right?

Let’s return to FTX. They were using customer funds to prop up Alameda. Those funds are gone. The crypto is spent. They had the keys and they were able to use the Crypto. On the Blockchain, keys prove ownership. They owned the funds.

Even Coinbase recently filed their financials with a statement that in the event of bankruptcy, Crypto held on the exchange may be forfeit.

So, the big lesson in all of this? DO NOT KEEP CRYPTO ON AN EXCHANGE. Not for any extended period of time. Always maintain your own keys and ownership of your assets.

Remember, not your keys, not your crypto. Anything can happen. It doesn’t matter who the exchange is. And of course, never, ever share your keys with anyone. They prove ownership, and you alone should maintain that ownership of your assets.

 

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Bayrd
Bayrd

I am a citizen journalist and a freelance and creative writer. I have been in the Crypto space for over a year now and am very Crypto-forward. Let's learn about the space together!


CryptoBasics
CryptoBasics

This blog seeks to educate new investors in the Crypto-space. We also discuss different investment strategies.

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