What are banks doing with your money?
Don't wait for another big corporate crash. We should have full visibility of where and how our money is being used by 'trusted' organizations.
What if your bank account gets drained to zero so quickly that you don’t have time to react? You try to withdraw your money but that app won’t let you. You can only watch on as your savings trickle down to nothing.
This post is about avoiding this nightmare.
When corporations fall, they take us down with them
In the past week, a crypto company worth ~$30B went crashing down to zero. This is of course FTX, a cryptocurrency exchange, along with its other affiliated companies like Alameda Research.
If you told me at the start of 2022 that Sam Bankman-Fried’s empire would go bankrupt, you were without a doubt crazy. The proof points of FTX’s legitimacy was unquestioned:
Top investors like Sequoia, Tiger Global, BlackRock… the list goes on
The exchange was at the top of the charts in performance
SBF, as he was known in crypto circles, was on the cover of Fortune
They had naming rights to the Miami Heat area! (Well not anymore)
But, real life is crazier than fiction! After a lot of Twitter drama with Binance’s CEO, it was found out that FTX reportedly used $10B in customer deposits in (shady?) activities that didn’t work out. The result is a debt so big that withdrawals from the exchange had to be paused which locked people out of their money. People lost their life savings. FTX is done it’s taking down many along with it. A corporation made mistakes, but it’s the everyday person that loses out.
Haven’t we learned that trust is an expensive hobby?
We keep doing this to ourselves. In 2007, we let banks put money into subprime mortgages. They lost our money. In 1998, we let a hedge fund take on big debt to bet big. They had to be bailed out. As it turns out, we’ve had many financial crisis throughout the centuries mostly because we dared to trust in other professionals and institutions.
How can we bank our money without needing to trust… a banker?
The root of the problem is that we’ve been so willing to trust, but had no way to independently verify the truth ourselves.
In the case of FTX, someone who deposited their funds and crypto into the exchange would not have a way to verify if their funds are actually still in the vault and untouched. As it turns out, billions of depositor funds were being moved around and used for purposes people were probably unaware of. But there was no way to track, monitor, and verify the case!
In the case of the 2007 mortgage crisis, we trusted our banks and investment professionals who, in turn, trusted the mortgaged-backed investments purchased were of good quality. As normal individual, even if you had an inkling that there was something amiss, you wouldn’t have been able to trace your money to where it was invested in. The technology just wasn’t there to do it!
Even if you were the most skeptical and savvy depositor in the world, there’d be no way for you to:
Know exactly where your money is in the banking system
Get the flexibility to dictate if your money is to be loaned out or not
Track where your money will be used if it is loaned out
Pull out your money immediately if you don’t like what you see
The financial system as it is right now simply wouldn’t be able to accommodate that level of transparency and control. The most we’ve been able to rely on is regulation. Again, we place our trust on a higher body (government) to do something if the first one we trusted (corporations) stabs us at the back!
Surely, there has to be a better way. If we could track every single transaction that happens with our money, even if we deposit it, then we wouldn’t have to blindly trust and be betrayed by corporations.
The always-on, real-time, never censored, public ledger that no one can hide or tamper with
Yup. Blockchain. Blockchain it all!
“BUT FTX, A CRYPTO EXCHANGE, JUST WENT BANKRUPT. WHAT ARE YOU SAYING??”
That’s right. But there’s a difference. FTX was a centralized custodial exchange. Meaning, they took control of your funds when you deposited them and they controlled the exchange. They had a master key for everything. This is an incomplete version of blockchain technology and it’s time we double down on innovation to completely move away from this approach that has plagued our financial systems.
We already have examples of what this can look like called decentralized exchanges (DEX).
Uniswap - is the most popular DEX on Ethereum
GMX - is a new DEX that tries to be more user friendly
dYdX - is another DEX with a focus on more sophisticated assets
How does it work and what makes it different from FTX and the whole system we’ve been complaining about in this post? Glad you asked! Three big things—decentralization, on-chain transparency, and self-custody of assets:
Decentralization. The opposite of centralization (duh). Theoretically, a decentralized app like Uniswap, GMX, and dYdX is not controlled by a single entity. For example, you should be able to copy the app and create one of your own and take all of the customers if they don’t serve their customers well. In fact, something like this already happened when SushiSwap (Uniswap’s competitor) captured ~50% of trading volume when it first launched. Emphasis on the theoretical potential of decentralization because it’s unrealistic to affirm that the original team that developed these apps don’t exert significant control on these projects. However, we’re much closer to the dream by keeping the code of these apps public (like GMX here) or building on top of protocols like Ethereum that are much further in decentralization journey. In an ideal world, no single entity controls these important apps that secure and move our money around. We should be able to withdraw our money whenever we want to without a bunch of people just deciding to stop withdrawals!
On-chain transparency. This is a fancy way of saying recording all transactions in a public record book that anyone can access. If all the transactions in FTX were recorded on chain, then it would have been possible for someone to trace trace transactions and spot anything suspicious. In fact, it’s already happening with the FTX debacle. People in Twitter are actively looking at public blockchain transactions to sniff out any odd activities. And odd activities there were! We need to leverage blockchain tech and enable more transparency.
Self-custody. Finally, we should always own and be in control of our assets. Rather than logging into an app, creating an account, and then depositing funds into a wallet the app controls, you connect your wallet and always have control of your funds. If you want out, you can get out anytime. The app can’t stop you. The concept of handing over your money to a bank and trusting them to take care of it is old fashioned when technology now allows a better way. Here’s a silly metaphor: it’s like hooking up your money on a fishing line—even if you hand it over to someone for safekeeping for a while, you can always pull on the line and get your money back!
Double down on building the next generation of blockchain products
The FTX incident is a huge let down for the web3 industry. But like how past financial crisis ushered in better banking practices, we should take this hard lesson as inspiration to build better web3 products that will ensure these issues don’t repeat.
Build projects that don’t compromise on the ethos of web3—decentralization, transparency, and self-custody. Support projects that don’t compromise.
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