Decentralized exchanges differ from their centralized counterparts (like FTX, Binance, Coinbase, and others) in a few important ways. Most notably, instead of relying on an intermediary to match buyers with sellers, DEXs let users transact on a peer-to-peer basis—and keep custody of their own funds.
This arrangement is one example of what’s known as decentralized finance, or DeFi, an initiative to develop a suite of financial services atop blockchain technology. In a Twitter thread published in July 2020 that now reads like a grim prophecy, Bankman-Fried described DeFi as “filled with potential” because it doesn’t involve “relying on trust.”
Members of the community see FTX’s collapse as a key moment for DeFi, which, they argue, is a remedy to the problems that have haunted the crypto sector over the past year, following the collapse of large centralized organizations like crypto lender Celsius and hedge fund Three Arrows Capital.
According to Hayden Adams, founder of UniSwap, the world’s largest DEX, this is “a good learning moment for the industry.” Although the DEX model suffers from a steeper learning curve for new users, he says, it eliminates the need to store coins with an exchange, which is what gave FTX the opportunity to divert customer funds to its sister company, Alameda Research, in the first place.
Andrew Trudel, a contributor to Kwenta, another DEX, says customers can never be completely sure what’s happening to their assets inside a centralized exchange. But with a DEX, “how funds are being used is fully transparent” because everything is hosted on a public blockchain, he argues. Both Trudel and Adams predict the traffic to decentralized exchanges will eventually exceed traditional exchanges for these reasons.
With FTX in ruins and the integrity of powerful, centralized crypto companies being called into question, DeFi is having a moment. But now that Open Book is up and running, the volunteers face a series of dilemmas. The initial goal was to prevent the collapse of Serum from spilling over into the wider Solana ecosystem, but the group must now reckon with the ongoing management of the DEX, which is another proposition entirely.
Among the first questions up for debate is what to do with SRM, the token created by FTX for Serum, $2.2 billion of which was listed on the company’s balance sheet. The token, which provides holders with a discount on trading fees, is still supported by Open Book at the time of writing.
Some of the Open Book volunteers, including Long, would rather see the back of FTX, period. Long says supporting SRM offers no material benefit to Open Book users and serves only to put money into the pockets of FTX because the value of SRM is effectively tied to the revenue generated by the exchange.
The management structure of the new DEX has also raised eyebrows. In a thread published on November 18, the Open Book volunteers explained that “upgrade authority” is now held by a small consortium of “reputable figures” from the Solana development community. Although the new model successfully cuts out FTX, traders are asking whether one overly centralized model has simply been replaced with another. To this question, the group of volunteers has yet to come up with an answer.
Aaron Kaplan, a securities attorney and co-CEO of trading platform Prometheum, says that although the final outcome for FTX and its customers is not yet crystal clear, there is precedent in scenarios such as this for people never to recover their funds. Unfortunately, those caught up in the collapse are left with little in the way of legal recourse, says Kaplan. “The facts will come out in time. What is clear at this present moment is that FTX was taking advantage of a gray area at the heart of which was the expectation of profit, irrespective of the best interest of customers.”
In a Twitter thread announcing the bankruptcy, Bankman-Fried implied he still hopes to help customers recover their funds. But thinking this unlikely, some FTX customers are attempting to flog their account balances at a steep discount. As reported by CoinDesk on November 9, buyers on messaging platform Telegram are bidding $0.10 to $0.15 cents on the dollar for funds tied up in FTX, gambling on the chance they may eventually be released.
The financial impact of the collapse extends far beyond the immediate FTX customer base, too. The week’s events have sent other crypto coins into a downward spiral, with the price of both bitcoin and ether falling by more than 10 percent, wiping upward of $60 billion from the market. Large sums of SOL, the native token of the Solana network, are owned by FTX and its subsidiaries, and therefore has been hit even harder. Between November 7 and November 9, the value of SOL fell from $32 per coin to $13.
A crypto trader who goes by the name Mando CT had at one point yesterday lost $637,000 on his SOL holdings and various Solana-based NFTs. (A slight recovery in the price of SOL, combined with other bets, has since helped him recoup some of these losses.) He says he remains confident in Solana’s core value proposition and quality of the technology, and has even purchased more SOL in an attempt to “buy the dip”, but concedes the fall of FTX will have “a huge impact on the whole market.”
Although developers whose apps sit atop Solana claim it’s still the best network for building services at scale—the CEOs of both Audium and Irreverent Labs, two such development studios, say they are unconcerned about price of SOL—others predict the knock-on effects of the FTX crash will have a detrimental effect on the overall health of the ecosystem.
“Developers in the blockchain space tend to put their efforts where the most money is located,” says Francesco Melpignano, CEO at Kadena Eco, which helps to incubate new projects tied to the Kadena blockchain. “If we see funds leaking away from Solana, developers will certainly be more incentivized to build elsewhere.”
Elsewhere, BlockFi says it was forced to cease operations, citing “a lack of clarity” over the situation at FTX. The crypto lender had itself been bailed out by FTX US earlier this year after it was caught up in the Three Arrows Capital collapse, but its future is now uncertain, illustrating the contagion effect described by CZ earlier today. “With FTX going down, we will see cascading effects,” he said. “Especially for those close to the FTX ecosystem.”
In the days since the crisis began, FTX’s Bankman-Fried, who is usually a prolific tweeter, has been uncharacteristically quiet. In a manic Twitter thread posted yesterday afternoon, he broke his silence: “I’m sorry,” he tweeted. “I fucked up, and should have done better.”
The FTX founder gave a puzzling explanation of the events that led up to the fall (something to do with “a poor labeling of bank-related accounts,” apparently) and set out a plan to do right by customers. “We’re spending the week doing everything we can to raise liquidity,” he wrote. “Every penny of that—and of the existing collateral—will go straight to users, unless or until we’ve done right by them.”
Although it will be cold comfort to those whose funds are stranded in the exchange, Bankman-Fried has himself suffered extraordinary losses. Today, Bloomberg reported that his personal fortune, worth $16 billion just last week, has been wiped out entirely in the collapse of FTX—every single dollar—in what’s described as “one of history’s greatest-ever destructions of wealth.”
CZ has denied that he deliberately created a liquidity crisis at FTX—”I spend my energy building, not fighting,” he tweeted on November 7—but Tim Mangnall, whose company Capital Block has consulted for both Binance and FTX, says this was a “shrewd” business manoeuvre by CZ, one that allowed him to “buy one of his biggest competitors for pennies on the dollar.”
All Hail CZ, King of Crypto
If it goes ahead, the deal will further reinforce Binance’s position as the world’s largest cryptocurrency exchange. It was already larger, by trading volume, than a clutch of its nearest competitors (Coinbase, Kraken, OKX, Bitfinex, Huobi, and FTX) combined.
Not only will the deal reduce the size of the pool of exchanges in operation, but Binance will also hold greater control over the kinds of coins that are widely listed for purchase. By the same token, the influence of CZ, already one of the most prominent figures in the crypto world, will also be magnified in debates around policy and regulation.
For the portion of the community that believes crypto should stand for decentralization, the merging of two of the world’s largest exchanges will also be cause for concern. Decentralization is all about the even distribution of power and eliminating single points of failure, but the FTX takeover supports neither ambition.
The alternative, however, was to allow FTX to collapse, which would have rocked crypto markets to the same extent as the fall of Terra-Luna and Celsius. “If FTX did go insolvent, it would have had catastrophic effects,” says Mangnall. In spite of the rescue deal, the prices of bitcoin and ether have fallen by more than 10 percent, wiping out more than $60 billion from the market.
The implosion of FTX will also raise questions about what should be done to protect crypto owners in future. One proposal, tabled by CZ, is that all exchanges should provide transparent “proof of reserves”—in other words, clearly demonstrate they have enough cash on hand to fund customer withdrawals. In a tweet, he promised that Binance will take up this policy “soon.”
Brian Armstrong, Coinbase CEO, expressed sympathy for FTX but also pointed to “risky business practices” and “conflicts of interest” that left the company exposed—something that, presumably, transparency requirements would also remedy. Separately, Armstrong moved to dismiss concerns that Coinbase might find itself in a similar liquidity crunch: “We hold all assets dollar for dollar,” he wrote on Twitter.
But others say this latest dance with disaster is evidence that people should not store their wealth with exchanges, full stop. “What we’re seeing now is a reminder of the importance of crypto custody,” says Pascal Gauthier, CEO at Ledger, which makes wallets to allow people to manage their own crypto. “You don’t own your crypto unless you use self-custody.”
Whatever the fallout, the acquisition marks the end of a long and storied rivalry between Binance and FTX—and hopefully, a catastrophe averted.
Before becoming Twitter’s CEO, owner, and “Chief Twit,” Elon Musk had often lobbed criticism at the platform for its approach to content moderation, even going so far as to target the company’s former policy chief Vijaya Gadde. But while Musk has expressed his concern about “liberal bias” on the platform, many activists, journalists, and advocates outside the US—where the majority of Twitter’s users reside—have begun to worry about how Twitter, now without a board or shareholders and led by a CEO with multiple business entanglements, will respond to authoritarian and authoritarian-leaning governments that have long sought to control public opinion.
“How he treats pressure from countries like Saudi Arabia and India—I think those are key indicators of where he’s going with the platform,” says David Kaye, former UN special rapporteur on the right to freedom of opinion and expression and clinical professor of law at the University of California, Irvine.
While Twitter does not boast nearly as many users as Meta-owned Facebook or Instagram, it is widely used by activists, civil society groups, journalists, and politicians—all of whom are influential in shaping public policy and opinion. The platform has also proved crucial for those organizing protests in places like India, Nigeria, and Argentina, and has provided an avenue for those living in highly controlled societies like Saudi Arabia to voice criticism of their governments.
Jason Pielemeier, executive director of the Global Network Initiative, says Musk’s goal to build Twitter’s user base to more than a billion people could also affect his willingness to battle it out with foreign governments to keep content on the platform.
Although they may not represent a huge share of Twitter’s revenue stream right now, countries like Turkey, Indonesia, Nigeria, and Pakistan, which have very large, increasingly online populations, are all attractive markets as the company looks to grow its revenue and increase its user base, according to Pielemeier. But all of those countries have had arguments with Twitter specifically or with social media companies more broadly, he says. Last year, the Nigerian government ordered all Internet Service Providers (ISPs) to block Twitter after the platform deleted a tweet from the country’s president, Muhammadu Buhari, for violating its policies. The government lifted the ban only after Twitter agreed to open an office in the country and pay local taxes.
In India, Twitter’s third largest market, the company filed a case earlier this year to contest the government’s order to remove individual pieces of content as well as whole accounts that the government considers a risk to India’s security or sovereignty.
But Raman Jit Singh Chima, senior international counsel and Asia Pacific policy director at Access Now, worries that Twitter under Musk may not continue with the lawsuit. (In his August countersuit against Twitter, Musk cited the lawsuit in India as a threat to the company’s presence in its third largest market.) “It would be a vindication of a very problematic, unconstitutional set of actions by the Indian government,” he says. “It also sends a signal to the global tech industry, saying ‘Back off, don’t try to do more.’”
As more and more problems with AI have surfaced, including biases around race, gender, and age, many tech companies have installed “ethical AI” teams ostensibly dedicated to identifying and mitigating such issues.
Twitter’s META unit was more progressive than most in publishing details of problems with the company’s AI systems, and in allowing outside researchers to probe its algorithms for new issues.
Last year, after Twitter users noticed that a photo-cropping algorithm seemed to favor white faces when choosing how to trim images, Twitter took the unusual decision to let its META unit publish details of the bias it uncovered. The group also launched one of the first ever “bias bounty” contests, which let outside researchers test the algorithm for other problems. Last October, Chowdhury’s team also published details of unintentional political bias on Twitter, showing how right-leaning news sources were, in fact, promoted more than left-leaning ones.
Many outside researchers saw the layoffs as a blow, not just for Twitter but for efforts to improve AI. “What a tragedy,” Kate Starbird, an associate professor at the University of Washington who studies online disinformation, wrote on Twitter.
“The META team was one of the only good case studies of a tech company running an AI ethics group that interacts with the public and academia with substantial credibility,” says Ali Alkhatib, director of the Center for Applied Data Ethics at the University of San Francisco.
Alkhatib says Chowdhury is incredibly well thought of within the AI ethics community and her team did genuinely valuable work holding Big Tech to account. “There aren’t many corporate ethics teams worth taking seriously,” he says. “This was one of the ones whose work I taught in classes.”
Mark Riedl, a professor studying AI at Georgia Tech, says the algorithms that Twitter and other social media giants use have a huge impact on people’s lives, and need to be studied. “Whether META had any impact inside Twitter is hard to discern from the outside, but the promise was there,” he says.
Riedl adds that letting outsiders probe Twitter’s algorithms was an important step toward more transparency and understanding of issues around AI. “They were becoming a watchdog that could help the rest of us understand how AI was affecting us,” he says. “The researchers at META had outstanding credentials with long histories of studying AI for social good.”
As for Musk’s idea of open-sourcing the Twitter algorithm, the reality would be far more complicated. There are many different algorithms that affect the way information is surfaced, and it’s challenging to understand them without the real time data they are being fed in terms of tweets, views, and likes.
The idea that there is one algorithm with explicit political leaning might oversimplify a system that can harbor more insidious biases and problems. Uncovering these is precisely the kind of work that Twitter’s META group was doing. “There aren’t many groups that rigorously study their own algorithms’ biases and errors,” says Alkhatib at the University of San Francisco. “META did that.” And now, it doesn’t.