Like many of you, we were surprised to see the rapid collapse of FTX, one of the largest crypto exchanges in the world. The complete details of what happened will take a while to unravel. We already know it’s not good. But we also know that crypto is bigger than any single company, no matter how large. And given what we’re discovering, it’s better this collapse happened now, and not years from now.
We were surprised but not shocked – not because we knew FTX was fraudulent, but because we know that centralized custodial services are vulnerable to human misjudgment, hubris, and misaligned incentives. The financial industry is one of the most highly regulated in the world precisely because of the long history of principal-agent crimes and catastrophes. But it’s not limited to finance: from banks to social networks to governments, the larger a “centralized” system becomes, the more likely it is to be corrupted and the greater the scale of the consequences.
At the core of our investment thesis is the belief that sovereign networks built on open-source protocols are our best shot at decentralizing data, wealth, and power. Bitcoin’s founding principle, informed by the global financial collapse in 2008, is to favor peer-to-peer networks over intermediary institutions; middlemachines over middlemen. So we invest almost exclusively in trustless, non-custodial service models across the stack: from base-layer stores of value, smart contract networks and developer tools, to proper DeFi protocols and non-custodial applications and interfaces where users truly own their data. We share this belief with every passionate entrepreneur, builder and user who chooses crypto and web3 because the architecture matters a lot more than getting rich quickly.
Indeed, centralization has been the root cause of every blow up in 2022 as none of them were true decentralized systems. Luna looked and talked like a protocol, but besides poor cryptoeconomic mechanisms, its reserves were centrally and poorly managed by a handful of fallible individuals. 3AC was overleveraged, and the centralized lenders (Celsius, Voyager, BlockFi, etc.) all suffered from the same affliction: human mismanagement and hubris. Wolves in DeFi clothing.
FTX is the worst of the bunch, and it will take the market many months to absorb the consequences of its collapse, starting with the users who lost assets. Outside of those users, falling asset prices affect everybody in different ways. But it’s not as bad as losing assets, and capitulations are a healthy way to flush bad assets and bad actors from the industry, at least in retrospect.
For Builders, if you’re working on truly decentralized systems, this event validates your work. Know that you’re building the right thing for the right reasons. Keep building networks, protocols and applications that protect users from corrupt individuals. Many users will leave for a while in disappointment, but those who remain will appreciate your work all the more, and those who’ve yet to come will enter a safer, more reliable web3. Keep building with confidence. Everyone in the know values your work today. Everyone else will soon.
For Users, whether you were directly affected or not, get smart about self-custody if you haven’t already. Internalize the difference between true dapps and custodial services. Know that the FTX collapse is the failure of a centralized intermediary, not a failure of blockchain systems or decentralized protocols, which continued functioning seamlessly through this debacle. Some of us remember Mt. Gox and a time when exchange blow-ups were routine. This is the largest-scale blow up to date, but until we have a consistent regulatory regime for centralized exchanges, it’s unlikely to be the last. On-chain will remain the safest place to be.
For Everyone, welcome to bear valley. We’re entering the phase of peak disillusionment. Many will leave. Many will be wiped out. The press will be damning and lawmakers will try to throw the baby out with the bathwater. Sentiment will hit all-time-lows. But remember that sentiment is always the worst at the bottom. And even when you’re through the bottom of the valley, the path forward is nevertheless an uphill battle. So it’s not going to be easy, but that’s why it’s going to be rewarding. When all is said and done, only the strongest remain, and that’s a good thing. You’ll remember and respect each other when it’s over. OG’s are built in bear markets.
For us, we’ll continue investing in decentralization at the same pace and with the same conviction as we have been since the beginning, choosing to work with entrepreneurs and communities who share these beliefs. Six years ago, when we started Placeholder, we could only talk about the benefits of decentralization from an ideological perspective. Many times we’ve left money on the table by passing on businesses that don’t fit that thesis. And we know a lot of the entrepreneurs we work with face similar tensions. It’s hard not to take the “centralized shortcut” to success, when it’s harder to build decentralized systems. But the FTX disaster is yet another example of exactly why we shouldn’t compromise on our core beliefs. It’s proof that it’s not just an idealistic belief, it’s a pragmatic concern. It’s another example of why decentralized is better.