How FTX Exposed the Problems in Centralised Finance and Underlined the Need for DeFi

In a massive setback to the crypto community around the world, the recent meltdown of crypto exchange FTX raised serious questions about the sustainability of the CeFi trading model (centralised finance). The FTX debacle is not the first of its kind. Over the last two years, the industry has come to grips with similar malicious maneuvers from industry-leading centralised exchanges like Celsius Network, BlockFi, and Voyager Digital.

FTX’s crash and subsequent filing for bankruptcy is a strong reminder of the basic rule of holding minimum funds on CEXs, only for immediate trading.

What Transpired at FTX?

Officially headquartered in the Bahamas, with offices in Chicago and Miami, FTX, until recently, was a high-flying cryptocurrency exchange with a valuation of $32Billion.

Offering crypto exposure to mainstream users, the exchange had the world’s largest share in global crypto trade, second only to Binance. FTX provided users with innovative services like spot trading, futures, and tokenized stocks along with features like a three-tiered liquidation model and a Centralised Collateral Pool for its token “FTT”. These were just a few of the many trailblazing innovations offered by FTX.

Yet, at the core of FTX’s operations, was a centuries-old CeFi model that used under-collateralized user assets in high-risk financial dealings, conveniently turning its back on principles of transparency and decentralisation. And, ultimately tearing the company to shreds, sending shockwaves across the crypto market around the world.

And, this is why the wreck that unfolded at FTX never would have and never could have materialised in a decentralised and transparent protocol.

Fundamental Issues at Play leading to the Collapse of FTX

There were fundamental issues at play that led to the collapse of the world’s second-largest cryptocurrency exchange:

The Timeline of the Fiasco:

What does the collapse mean for FTX users?

As the dust from this massive implosion settles, the most important questions to emerge are how and whether FTX customers will be able to access their money. The answer, according to many industry experts, is that there may be only a very thin possibility of recovery although the exact outcome will depend on the findings of ongoing regulatory investigations. The legal ramifications for FTX remain unclear. However, after FTT (the crypto token issued by FTX), lost more than 90% of its value over the past week, it looks increasingly likely that customers who handed their money over to FTX may not be able to recover any of their funds or even close.

Underlining the Importance of DeFi

Is there a silver lining? Yes! And a “silver lesson” too! If there is a silver lining to come out of the FTX fiasco, it is a reminder of the importance of truly decentralised applications. The FTX disaster has exposed the problems in Centralised Finance and has underlined the need for DeFi.

JPMorgan has stressed on the importance of DeFi in a recent note stating that even though the fall of FTX sent shockwaves across the cryptocurrency markets, this could create a future for accelerated cryptocurrency regulation. In the note, the banking giant also acknowledged the fact that the recent cryptocurrency collapses have not been from decentralised protocols but from centralised players. And, therefore the recent events can awaken and speed up regulations by aiding in the institutional adoption of cryptocurrencies.

While the episode has sent shockwaves across the industry and has struck a sledgehammer on all crypto prices, the truth remains that the FTX collapse was a failure of CeFi, not DeFi — and smart investors, builders, and users are already taking notice.

Closing thoughts:

These are exactly the issues we’re trying to address at TeraBlock!

It is still not confirmed whether FTX had been using customer funds for speculative activities and how much of those funds were lost in the process. However, the fact remains that the deposits made by the users were not supposed to be subjected to that kind of risk. The underlying issues at FTX were extremely appalling but it is even more frightening to consider that customer funds clearly weren’t where they were supposed to be.

The whole liquidity crisis threw light on the fact that FTX operated in a manner that allowed it to gamble with users’ funds. Like most of the other Centralised Exchanges, FTX too, had an extremely closed and non-transparent structure where the control and access to users’ assets rested with the owners of the exchange. This is in stark contrast to how TeraBlock operates. TeraBlock is non-custodial; The platform does not control your funds. TeraBlock users retain complete control and access over their funds at all times.

In fact, these are the very problems that TeraBlock has sought to address over the years through innovation and technology. Decentralisation seeks to address the limitations in legacy Finance and TeraBlock started out as an early contributor to this effort. We are progressing towards a secure and structured DeFi platform that makes it exceedingly simple for beginners to participate in the DeFi revolution.

Our vision is to build a radically transparent and inclusive ecosystem that thrives on decentralisation, one without custodians or intermediaries as gatekeepers and one that can be accessed by anyone anywhere in the world.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store

Diversified one-stop Decentralised Finance (DeFi) gateway to enable the masses to benefit from the crypto revolution.