It seems a month can’t go by at the moment without some industry-altering news coming out and sending Web3 into another tailspin. This month’s focus has been FTX, a centralized cryptocurrency exchange that was worth over $32 billion at the beginning of 2022. Fast forward to November, and the company is now bankrupt, with the ex-CEO now possibly facing criminal charges.
Once again, a well-established project within this space has turned out to be deceitful, with FTX illegally funneling user funds off the platform to a sister company. This event has shaken the community, with the lack of transparency that blockchain companies offer calling into question the validity of many of the ecosystem’s leading projects.
With alarm bells ringing and speculation at an all-time high, people are wondering how the world of crypto will recover. In this article, we’ll dive into what Web3 businesses are doing to overcome this shocking moment and build toward a more transparent future.
What Happened with FTX?
During the first week of November, the co-founder of Binance, Mr. Zhao, announced that he had decided to liquidate all of his FTT holdings. FTT was the native currency of FTX, with the sudden withdrawal of nearly $580 million sending other holders into a panic. It was rumored that this decision to liquidate came after the CEO of FTX, Sam Bankman-Fried, had been critiquing Zhao in private conversations.
In response to the mass movement to withdraw funds, FTX froze all user accounts, preventing millions of users from touching or accessing their assets. Once this news broke, the value of the FTT token plummeted, losing much of its value in the space of only a few hours.
On a rather shark-like move on his part, Zhao then announced that he would swoop in to buy FTX – as Binance and FTX were still major rivals at this point. A few hours after this announcement, Zhao made another statement, citing unsettling financial records within FTX as the reason he was pulling out of the deal.
Journalists at Reuters then began to research these statements further, uncovering the final piece of the puzzle that led to the whole system crashing down. According to a recently published report, Bankman-Fried had funneled funds from FTX into his partner company, Alameda Research.
Alameda had made a series of VC investments that ended up badly for the company. To repay lost capital, SBF started transferring user funds from FTX over to the company as a bailout. The only problem with this is that those funds belonged to customers, with FTX illegally moving the money. The total amount stolen circled around $4 billion at the time of discovery.
People within the blockchain community are, rightfully, up in arms about this. In response, many call into question the validity of companies that don’t share their financial records. If the records were public, people would have been able to see the nearly empty FTX treasury and would have cottoned on to the theft much easier.
Currently, the Justice Department is investigating Banker-Fried, with this crime possibly resulting in years of jail time. Beyond holding a few people responsible, this event has made the blockchain community seek a complete shift.
People want transparency, and they want it now.
How Can Web3 Businesses Provide Transparency?
The FTX saga has shown the world that not all cryptocurrency businesses can be trusted. Before its fall, FTX was the third-biggest cryptocurrency exchange currently active, holding funds for millions of distinct customers. Many assumed that just due to its size, FTX was too big to fail. As we’ve seen in the space of about ten days, that was far from the truth.
One of the main problems with FTX is that it was a centralized cryptocurrency exchange. What this means is that all of the transactions weren’t actually recorded onto the blockchain. Normally, the blockchain acts as an unchangeable ledger of transactions, one that is publically available to all. Within decentralized exchanges, this means that users can simply go and see if the transactions they requested have actually been recorded correctly.
As a centralized exchange, FTX was just recording all transactions to their internal ledgers. These ledgers were private, with all of this information being hidden from the public. While they claimed to do this out of a desire for protection and security, we now see that it was the perfect front for misusing user funds.
No one could see where their cryptocurrency was going, nor if FTX actually had the amount of liquidity that it said it did. When the chairman of Binance pulled out of the acquisition of FTX due to missing records, red flags went off from the public.
This problem is unique to centralized exchanges that companies are rapidly scrambling to fix. For companies in the same position they’re now faced with a lot of user questions, with many people wanting to see full transparency around financial data. This has put a lot of businesses in hot water.
Those that are accepting suddenly have to produce incredibly detailed results, which take resources. Those that reject producing these documents suddenly look incredibly guilty, leading to users pulling out from their systems.
The only companies that are continuing on as normal within the Web3 landscape are those that have already been publishing their financial data. Of course, any completely decentralized system has to run its transactions via a blockchain ecosystem, meaning they have a traceable record.
However, the real winners of this situation have been brands like Decentral Games. This company has had a history of publicly tweeting its revenue, treasury reserves, and all other financial data every single month. Instead of leaping at this opportunity as some semblance of a PR reaction to FTX, they’ve already been doing this for quite some time.
Companies like Decentral Games represent the very best of Web3 organizations; those businesses that are devoted to full transparency are the ones seeing success in this environment.
What Does the Future of Web3 Hold?
Web3 is still going strong, despite the week of turbulence that companies in this space have experienced. The sudden collapse of a large blockchain business isn’t as strange in this industry as it would be in other spheres. In this environment, we’ve become used to projects blowing up and shrinking rapidly in size.
One thing that’s made itself evidently clear is that the central ideals of blockchain are as important as ever before. Authenticity, decentralization, and true transparency will always reign as king in this arena. For companies that are looking to distinguish themselves from the masses and earn the support of the community, emphasizing being transparent is key.
If we can take anything from this situation, it’s that companies like Decentral Games that have already baked truth and user access into their business model will go much further than those hiding their data. For Web3 to be truly successful, we need to build toward an open future with a fair and transparent data exchange.
To the companies that fail to do this – what do you have to hide?