Fighting for the Soul of Crypto
SBF grins when asked about the funds he transferred to Alameda.
FTX collapsed causing the crypto market to fall into shambles. FUD (Fear, uncertainty, and doubt) are spreading like wildfire throughout the industry and people have every right to be scared.
I’ve been an active member of the crypto community since 2012 and Tuesday, November 8th was the worst day we’ve ever seen. It was worse than the collapse of Cryptsy, Mt. Gox, Terra (LUNA), and 3AC. FTX became the meteor that will cast smoke into our skies for years to come.
But the show must go on.
The fallout of the FTX collapse will be the battle for the soul of crypto. Millions of exchange customers are pissed, builders are questioning if the industry will ever recover, and VCs are re-evaluating their due diligence processes.
In the following sections, I will outline how we can rebuild accountability and trust for each of these groups of people.
Customers
Let’s begin by talking about customers since they are the most important. In the current crypto climate, customers don’t have anyone they can trust. The problem is that every day people don’t have the power or authority to enact accountability in the crypto space.
If an exchange messes up a customer’s order (e.g. FTX), they can just tell you to screw off. If a protocol collapses and the customer loses all of their money (e.g. LUNA), the protocol can just run off with all the funds and the customer will be left high and dry.
Every scandal ends with customers getting trampled.
Customers will only be able to thrive in the crypto space once there is accountability. In traditional finance, the accountability comes from regulation, institutional partners, and private offices.
Let’s illustrate this with a concrete example. Imagine you are a retail investor that wants to purchase Apple stock. You would sign up for a brokerage account with Fidelity, E*Trade, or Charles Schwab and they would purchase the stock for you on a stock exchange like Nasdaq.
Notice how you don’t sign up and directly purchase the stock on Nasdaq.
During that purchase process, if Nasdaq messes up the order placed by your broker, the broker will be able to hold Nasdaq accountable because they have the resources and reputation to make it happen.
If you bought a stock on Nasdaq directly and they made a mistake, you would have no power to influence an outcome. Similar to the situation with crypto exchanges today.
Based on this example, we’ve demonstrated the power of having institutions holding their partners accountable. Nasdaq knows that if they screw up, they will have powerful people very upset with them.
In the next phase of crypto development, we need to get retail investors off of crypto exchanges. Retail investors should never be trading on crypto exchanges. They don’t have the sophistication to understand how exchanges operate, and they don’t have the influence to be able to direct change when an exchange screws them over.
Instead, retail investors must have access to accountable investment advisors and brokers who will help manage the crypto assets as well as hold their counterparties accountable. This will strengthen the position of retail investors and ensure they are not the party that gets trampled every time something goes wrong.
Builders
This period will be painful for builders. We are seeing an emergence of infighting between two groups of individuals who have strongly opposing views.
CeFi + Regulation
The first group of builders believe that the only way out of the current situation is to drive towards more centralized services with increasing regulation.
This group argues that DeFi cannot be regulated, therefore it won’t have long term viability. Obviously, this would throw the entire purpose of the industry out the window, so we can’t have this be the only answer.
However, we need to agree as an industry that regulation for centralized services is necessary and welcome. It will take some time to find a balance, but we need to be cautious of both over and under regulation in the space.
DeFi
The second group of builders believe that DeFi is the only way. It is their mission to completely abandon any infrastructure that resembles centralized services and move completely into a decentralized future.
The problem with this stance is that it’s both impractical and counter to the values that are held by most customers. DeFi is still too difficult to use as an average person, and very few people have enough passion for crypto to join the movement.
Going fully into DeFi is also not the right answer.
We believe there is a balance between these two groups of builders. In order to bring the next generation of investors into the crypto market, we must both see accountability and trust in centralized parties. This can only be achieved through appropriate regulation of entities. At the same time, we must work towards moving retail investors off of exchanges. They do not possess the sophistication or power to be using exchanges.
On the other side, DeFi must reposition itself towards a focus on the customer. This can start with rebranding as “Developer Finance” and rethinking how developers use protocols and networks to service their customers.
Read my in-depth article on this topic here.
Venture Capitalists
Over the last 4 years I’ve been advised by many of the leading VCs in the world to risk our company treasury by placing our funds in yield-generating protocols or services. If we had listened to those words of advice, today our company would be out of business.
In addition to risking our company treasury, our team has been bombarded with VCs who request our team to find ways to launch a token of our own. Even though there would be no utility for such a token beyond the VCs getting early liquidity.
VCs have become so greedy that they will happily risk their own reputation, as well as the longevity of their portfolio companies, by pumping the market full of over-leveraged companies, pump and dumps, and shady businesses. They fund them knowing full well that there is massive risk.
After FTX collapsed, we heard from several VC firms that they did conduct the proper due diligence while investing in FTX. That suggests one of three things: 1) They were lied to. FTX cooked the books and provided false information. 2) VCs are lying. They didn’t actually do their due diligence. 3) VCs are incompetent. It would be blatantly obvious from spending 2 minutes with FTXs books that they were insolvent.
My money is on a combination of 1 and 2. While it has become obvious that SBF was willing to lie between his teeth at every corner, I’ve also had firsthand experience with the amount of due diligence that VCs were running during the 2021 bull market. Let me tell you, it’s almost nothing.
In order for the industry to fully mature, we need the VCs to mature. Rather than doubling down on tokens that possess no utility outside pumping their own bags, VCs need to return to investing for the long-term. We need to stop offering token rights to VCs and only offering stock. This incentivizes VCs to stop focusing on the short-term pump and dump and instead focus on the long-term viability of the business.
This will begin reviving trust in the market and align the incentives of the VC and their portfolio companies. It will also prevent VCs from pressuring startups to bypass regulations to launch tokens.
VCs have a lot of work to do on themselves. Although they will shift the blame to the founders of these startups, they are not without fault. They encourage these faul behaviors which are taking down the entire industry.
How can we move forward?
To move the industry forward and revive our market, we must all work together. Founders, investors, regulators, and customers need to be a part of this movement. If we don’t work in harmony to fix the issues of this space, it will only take longer to dig ourselves out.
Shrimpy is doing our part by announcing that we will launch the first full robo-advisory for retail digital asset investors. Our team has received SEC-approval to launch the advisory, where we will offer specialized baskets of assets that give the every day investor exposure to the different markets in crypto.
Whether you want exposure to DeFi, Layer 1s, or Utility Tokens. Shrimpy Advisory is a SEC-approved advisory that will bring millions of new investors into the market. We will be the most trusted way to buy crypto.
Shrimpy is an account aggregating platform for cryptocurrency. It is designed for both professional and novice traders to come and learn about the growing crypto industry. Trade with ease, track your performance, and analyze the market. Shrimpy is the trusted platform for trading over $13B in digital assets.
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