Related topics: Two tigers fighting: the entanglement and competition between CZ and SBF

There is no shortage of drama in the encryption industry. The two shocking reversals last night and this morning have left community users on tenterhooks. The end of the matter is disappointing, because the cryptocurrency industry that was born in response to the Lehman Brothers moment in 2008 went back to Lehman.

In the early morning of November 9th, Beijing time, when the crypto community was still predicting how the FTX incident would develop, FTX founder SBF and Binance founder CZ successively tweeted that the two parties had reached an agreement on strategic investment and signed a Non-binding letter of intent to fully acquire FTX and help combat the liquidity crunch. However, it will still take several days for complete due diligence to be carried out, so things are uncertain and users are reminded to expect FTT prices to be highly volatile in the coming days.

Affected by this news, the prices of FTT and BNB rose by 40% and 20% respectively in a short period of time, and the overall encryption market also rebounded rapidly. However, the good times did not last long. Just when the crypto community began to discuss Binance's acquisition of FTX heatedly, the price of FTT suddenly began to fall rapidly at 1 a.m., falling as low as $2.5, a short-term drop of 88%.

There are two main reasons for the sudden drop. First, a lawyer reminded that Binance’s acquisition of FTX may trigger an antitrust investigation by the regulatory agency, implying that the acquisition may not be completed. At the same time, foreign media Semafor also broke the news that SBF had sought more than $1 billion in bailouts from billionaires on Wall Street and Silicon Valley before reaching an acquisition agreement with Binance. However, by noon on Tuesday, FTX’s funding gap had rapidly expanded to 50 to 50%. $6 billion. PANews learned from multiple sources that from the evening of November 7, the Alameda team began to borrow money from institutions everywhere, which reflected its huge shortfall in funds, which triggered the decline in the morning of November 8.

As more information is revealed, the truth of the matter is gradually restored.

In fact, Alameda and FTX have reached a crisis point since the second quarter of this year. CoinMetrics research director Lucas Nuzzi analyzed on Twitter that the reason for the misappropriation of user funds may be the reason why FTX will provide Alameda with a large-scale bailout in the second quarter of 2022. According to data analysis, Alameda reached the edge of collapse in the second quarter of this year together with Three Arrows Capital and others. It survived because it used 17.2 million FTT guaranteed to be released after 4 months as collateral to obtain from FTX Once funds are released, all tokens are returned as repayment.

FTT's token release unlocking contract is automatically vested, and if FTX lets Alameda implode in May, their collapse will ensure that all FTT tokens subsequently released in September are liquidated. This would be terrible for FTX, so they have to find a way to avoid this. Alameda and FTX actually put all their chips on the table in Q2 and used the money to bail out other companies, which solidified FTX's image as a solvent and responsible institution and helped FTT's price rise.

Nowadays, SBF and FTX no longer talk harshly. The large funding gap and being "chaoan" by Binance have also confirmed in disguise that the FTX platform has indeed misappropriated user funds. This is why FTX did not respond to the large number of users' demand for currency withdrawals. The cold wallet transfers funds to the exchange, but transfers funds from various exchanges, patchwork, because FTX places user funds in various exchanges.

It is now common for crypto exchanges to misappropriate user funds. At the earliest, there was the Mentougou incident that misappropriated 750,000 Bitcoins from users. Later, Fcoin was unable to redeem 7,000 to 13,000 BTC from users. This year, exchanges such as Hufu and AEX misappropriated user assets for leveraged mining, resulting in the inability to redeem user funds. Today, FTX, the world’s second-ranked exchange, has also embarked on this path due to the lack of internal risk control.

What warnings does FTX’s crisis give the crypto industry?

Coinbase co-founder Brian Armstrong: Build better systems using DeFi and self-hosted wallets

Coinbase co-founder Brian Armstrong tweeted that the incident appeared to be the result of risky business practices, including conflicts of interest between deeply intertwined entities, and the misuse of customer funds (lending user assets). Coinbase believes that transparency and trust are very important. Every investor and customer can see Coinbase's publicly audited financial data, and no tokens have ever been issued.

Part of the problem here is that regulators have been focusing on the onshore side of their respective markets, while clients have turned their attention to companies with more opaque and risky offshore operations. Taking the United States as an example, more than 95% of crypto transactions have developed overseas because U.S. crypto regulation has been difficult to navigate.

Such incidents have prompted calls for tougher regulation. This will only make the problem of crypto companies and crypto users going overseas worse. We should continue to work with policymakers to develop sensible regulations for centralized exchanges or custodians in each market, but we need to see a level playing field operating, and this has not happened so far.

In the long term, the cryptocurrency industry has an opportunity to build better systems using DeFi and self-hosted wallets that do not rely on trusted third parties. Instead, you can trust the code or the math, and everything is publicly auditable on-chain.

Circle co-founder Jeremy Allaire: Lack of transparency, lack of clear counterparties, and mostly speculative assets

Jeremy Allaire, co-founder of USDC issuer Circle, tweeted that the bear market cycle of the entire market has given us many opportunities to reflect on the deep problems in the market. Lack of transparency, lack of clear counterparties, and project funding and balance sheets based on speculative tokens are the root causes. In past bull markets, a great deal of the so-called "value creation" was almost entirely speculative, and a focus on practicality was often an afterthought or completely non-existent.

At the same time, as Brian Armstrong points out, the lack of clear regulatory guidelines in the United States ultimately encourages users and projects to take more risks and proceed offshore. In fact, offshore regulatory arbitrage has spawned global companies with no known basis and which often operate with impunity. If U.S. policymakers don’t get their act together, the outcome will be worse.

We must decisively move from the speculative value stage of cryptocurrencies to the practical value stage, and this must be based on more open and transparent practices. The good news is that the foundation built with cryptographic infrastructure and public chains gives us the building blocks to now reinvent financial services with unprecedented transparency. I hope that as an industry we can seriously move towards more and more activity happening in DeFi and on-chain structures. To do this, we need verifiable cryptographically provable identities, as well as significant and better on-chain privacy technologies.

Hopefully these CeFi crises won’t poison the distributed and decentralized future and policymakers will act quickly but carefully, which could be a huge disruption for the world. But we should not just praise enforcement actions; we need to be held accountable for blatant fraud as well as manipulative and anti-competitive market behavior. The market and users are hurting. As the industry takes stock, I expect the focus will begin to shift toward building durable, high-utility products designed to run on open on-chain infrastructure. Finally, as someone who has been in the industry for 10 years, it's disappointing that a technology spawned in response to the 2008 Lehman Brothers moment has spawned identical versions of itself.

Binance founder CZ: Don’t use self-created tokens as collateral

Binance founder CZ tweeted that two lessons can be learned from this FTX liquidity crisis: 1) Do not use the tokens you create as collateral. 2) You should not borrow money to run a cryptocurrency business. Don't use capital too efficiently and hold large reserves. In addition, Changpeng Zhao said that Binance has never used BNB as collateral and has never been in debt.

At the same time, CZ said that all cryptocurrency exchanges should do merkle-tree proof of reserves. Banks operate on fractional reserves but cryptocurrency exchanges should not. Binance will soon start doing fully transparent proof of capital reserves.

Ki Young Ju, co-founder of Cryptoquant, commented that after four years of tracking Binance’s wallets, they have achieved 99% transparency through several cold wallets and hot wallets, while other exchanges store customers’ assets with third parties. Wallets are mixed.

Subsequently, cryptocurrency exchanges OKX and Huobi also tweeted that it is important for all major cryptocurrency exchanges to publicly share their auditable merkle tree proof of reserves, or POF. The certification is scheduled to be released in the coming weeks (within 30 days). This is an important step in establishing baseline trust in the industry.

What is the future of the crypto industry?

The FTX incident will make it more difficult for centralized exchanges to gain trust. It will also make traditional institutions lose confidence in entering the market in the short term, making individual investors lack confidence and wait and see. There is a high probability that other related centralized finance will trigger chain reactions in the future.

From the perspective of a pessimist, the repeated thunderstorms and crises in the encryption industry have further confirmed and deepened the stereotype of encryption scams to the outside world, and also made the original practitioners think and doubt whether the encryption industry is worth investing in its construction.

But from the perspective of an optimist, it is precisely these thunderstorms and crises that continue to promote the development of the encryption industry in a better direction, making the game between centralized companies and decentralized protocols more transparent, rather than simply The use of financial instruments leads to a cycle of issuing assets to inflate bubbles and reaping profits. Such behavior will ultimately shoot oneself in the foot.

As the two co-founders of Coinbase and Circle said earlier, FTX’s impact on the industry will be good for DeFi and all on-chain management in the long run. In centralized finance, stakeholders play against each other, use people to achieve unexplainable purposes, and use information and financial advantages to short and long to harvest individual investors.

As an industry OG said to PANews, Web3 requires new standards and perspectives. One of the essences of decentralization is to be open and transparent. Compared with creating a boss persona, transparency is the real persona. Decentralized products are the core needs of the industry. Openness and transparency itself is the most powerful and effective form of supervision. Only true transparency itself is king. The ultimate goal of supervision is that there is no need for supervision. Therefore, all high-quality decentralized products have huge potential.