The FTX Fallout and why DEXes are the future


It is always tough when a few undo the work of the majority in propelling an industry forward. The crypto industry has had its share of trusted entities unravel, leading to millions in losses of customer funds. The Mt. GOX exchange hack in 2014, fraudulent ICOs of 2017-18, and Terra Luna’s collapse in 2022 were some of the most devastating hits with grave repercussions for both users and the sectors’ reputation.

One of the most significant collapses of late is FTX, one of the largest cryptocurrency exchanges in the world led by its controversial CEO, Sam Bankman-Fried. At its core, entities like FTX suffered from lack of sound risk management practices and unsustainable business models which led to their downfall at the first sign of a market vulnerability. As a result, it’s drawn attention to the centralized custodial models that many of these entities are based on and has renewed calls for the importance of decentralization and DeFi (decentralized finance). Accordingly, decentralized exchanges like Liquid Crypto are increasingly proving their utility.

A closer look at the FTX Collapse

On November 11th, 2022, major cryptocurrency exchange FTX collapsed spectacularly. As the circumstances of the collapse became public, revelations of poor corporate governance, conflict of interest, and alleged criminal conduct came to light.

Bankman-Fried (popularly known as SBF) founded FTX in 2019 at a time where the cryptocurrency market was on its way to new heights. FTX gained traction quickly and reached its peak in 2021 amid market highs, and SBF emerged as a charismatic leader and founder in the space. SBF had a net worth of about $16 billion, and the exchange seemed like it would be a permanent fixture in the crypto landscape for a long time. When news emerged that FTX would be filing for chapter 11 bankruptcy in early November, many wondered what went wrong for a seemingly robust institution.

It was later revealed that the company claimed to be valued at $32 billion was an exaggeration. FTX had built up a lie that it was a secure and stable exchange, yet had its liabilities outnumber the sellable assets it held by a margin of 10:1.

There was also a revelation that SBF had allegedly built a backdoor to siphon exchange funds to himself. SBF was arraigned before a New York District court on January 3rd, 2023, on charges of wire fraud, conspiracy to commit money laundering and conspiracy to misuse customer funds. If convicted, he faces decades in prison for the serious charges. He was granted a $250 million bond, which sets the tone for his trial, expected to start later this year. The repercussions for FTX and SBF as a founder as a result of the lack of proper corporate governance should serve as a stern warning on what to expect should they have similar reckless practices.

The dramatic collapse of FTX intensified scrutiny on the merits and integrity of the centralized custodial exchange model. Proponents like Binance CEO, Changpeng Zhao, sought to distance themselves from SBF and this model. As was the case here, during periods of market panic, centralized exchanges without adequate capital buffers and proof of reserves can falter from high withdrawal requests that cannot be met. Unlike banks, these centralized exchanges cannot print more money on demand, and their vulnerabilities become exposed.

The case for DeFi and DEXes

Centralized cryptocurrency exchanges are a controversial concept for the blockchain sector. A centralized exchange means that the entity holds custody over the funds, and users can create accounts and deposit crypto into their exchange wallets. Therefore, such exchanges are similar to traditional banks that take deposits. Users must trust that the bank will have proper corporate governance to protect their deposits and continue providing services. It is difficult to reconcile an exchange that boasts of its decentralized credentials with the existence of centralized control.

The idea of a DEX is that it eliminates a centralized custodial storage of funds. Instead, a DEX uses smart contracts for users to provide the liquidity necessary for exchanging crypto and for others to access their desired tokens for trading or borrowing.

Liquidity pool-based platforms facilitated by platforms like Liquid Crypto bring this asset class back to its original vision of making self-custody a reality in a peer-to-peer exchange model. Such platforms effectively facilitate users exchanging among themselves. Moreover, users benefit from earning yield and a portion of the transaction fees, a feature usually only within the domain of centralized exchanges or banks.

DEXes are the protagonists the industry needs

Blockchain technology is an innovation with fundamental ideals for how the world should be. At its core, this technology seeks to democratize finance and wealth generation, and Liquid Crypto and decentralized platforms can play a role in helping drive the industry towards this vision. At a time when the crypto sector has significant credibility challenges, the DeFi community needs to step up in order to restore trust in this sector and return the industry’s power to the people that it serves: its users.

About Liquid Crypto

Liquid Crypto is a fully decentralized exchange that aims to unlock the real value of decentralized finance for all investors. Liquid+, its core product, has been built on a foundation of transparency and security with a user-friendly interface, custodial and non-custodial wallets, and cross-chain and multi-chain options. Through its unique custom aggregated baskets, it makes wealth generation and investing accessible for everyone.

For more information, don’t hesitate to get in touch with:

Meagan Henderson

Email: [email protected]


Twitter: @_LiquidCrypto