I predicted FTX's collapse a month before it happened

The illness of FTX has shown that wherever there’s smoke, there’s fire.

In a twelvemonth filled with jaw-dropping unveilings, nary comparison to the bewildering autumn of Sam Bankman-Fried’s FTX exchange. While galore were stunned, determination were a fewer tell-tale signs that whitethorn person indicated not everything was peachy-perfect implicit astatine FTX headquarters.

These issues began to compound and, connected Oct. 5, I published a elaborate commentary astir my determination to statesman pulling funds retired of FTX and abbreviated FTT.

— Ishan B (@Ishanb22) October 5, 2022

The bottommost enactment is that things didn’t look right. A period later, we’re witnessing the fallout.

This is not meant to beryllium a triumph lap, but alternatively an accidental to larn from our corporate mistakes and make the systems indispensable to forestall this level of fraud from happening again.

Now, we person beardown allegations that what happened constituted fraud — astatine the highest levels, by the slightest conceivable party. Here are immoderate reasons these circumstances were foreseeable, and however they tin beryllium fixed successful the future.

Top executives leaving

While hindsight is 20/20, the drawstring of apical FTX executives leaving should person been a elephantine reddish flag. Alameda Research CEO Sam Trabucco announced his resignation connected Aug. 24, followed by FTX US CEO Brett Harrison connected Sept. 27. On Oct. 3, it was reported that FTX’s caput of over-the-counter and organization sales, Jonathan Cheesman, had besides near the firm.

Related: Will SBF look consequences for mismanaging FTX? Don’t number connected it

Cheesman and Harrison were astatine the steadfast for a small much than a year. Without knowing the specifications of their deals, equity is typically vested implicit a multi-year horizon. So, wherefore would apical executives permission without afloat vesting their equity successful a rapidly growing, $30 cardinal firm?

Poor concern performance

As a backstage company, it was hard to afloat grasp the fiscal outlook for FTX, but determination were signs of trouble.

First, trading measurement was down significantly. It had decreased to December 2020 levels. Levels that hadn’t been seen since the monumental bull tally began.

Lack of measurement straight correlates to little revenue. This, coupled with the maturation of decentralized competitors specified arsenic Gains Network and GMX, meant that the concern could not person been astatine its healthiest — but FTX was inactive spending arsenic if it was:

1. The FTX NFT marketplace gained minimal traction but indispensable person been rather an costly endeavor.
2. They had precocious agreed to a $212 cardinal woody for naming rights to the Miami Heat arena.
3. FTX Ventures, the company's task superior arm, had consistently made large, late-stage investments. Massive cheque sizes into highly illiquid positions.

FTX US past launched FTX stocks to connection U.S. investors vulnerability to equities — a weird merchandise hold for a crypto-native firm. Why not supply much crypto-related products oregon make solutions to assistance the industry? Even then, it seemed similar a anemic effort astatine recovering immoderate mislaid revenues from the simplification successful volume.

How we tin hole this

A omniscient antheral erstwhile said, “Life’s top lessons are usually learned astatine the worst times from the worst mistakes.”

So, what are the astir important lessons to larn from these times? Decentralization. Decentralization. Decentralization.

Related: Let’s determination connected from FTX’s illness and get backmost to the basics

This has been astatine the halfway ethos of the decentralization of finance, yet we inactive request a Lehman Brothers-type illness to re-learn the value of this lesson.

Decentralization necessitates a trustless situation wherever accusation tin beryllium verified astatine immoderate time. For example, if you deliberation that FTX mightiness person a $5 billion-plus spread successful its equilibrium sheet, you request to beryllium capable to verify however existent that is. The problems originate erstwhile these elemental questions are purposely obscured to defraud organization and retail investors.

Why is decentralization important?

— Barry Fried (@BarryFried1) November 6, 2022

Decentralized concern (DeFi) doesn’t springiness peculiar treatment. It doesn’t spot you nary substance however galore times you’ve been connected CNBC oregon Bankless. If you person a loan, it indispensable beryllium repaid oregon it volition beryllium liquidated.

Decentralized concern is the large equalizer. It continued moving without immoderate hiccups amidst 1 of the astir monumental, unforeseen collapses successful the past of finance.

— Leshner (@rleshner) November 8, 2022

What’s next

Many DeFi advocates judge that we are simply speed-running the past of concern and each the lessons we’ve learned astir money, finance, economics, etc., implicit the past 2,000 years. That’s a possibility.

While the implosion of FTX whitethorn beryllium a heavy blemish connected the manufacture arsenic a whole, there's inactive overmuch to beryllium excited about. Let’s instrumentality this arsenic an accidental to treble down connected the value of self-custody, spot minimization, and permissionless, open-source entree — the existent ethos of this space.

Lastly, let's retrieve ne'er to spot larger-than-life figures that germinate from the crypto space, nary substance however efficaciously altruistic oregon cleanable they whitethorn seem. Trust nary 1 and verify.

The opinions expressed are the author’s unsocial and bash not needfully bespeak the views of Cointelegraph. This nonfiction is for wide accusation purposes and is not intended to beryllium and should not beryllium taken arsenic ineligible oregon concern advice.