feelsbadman

Some brain vomit on the FTX saga.

FTX happened just about a month ago. And while I got out, my friend didn’t.

:feelsbadman:

I’ve been mulling it over for a while, and I was committed to writing down the thought process before the year ended.

So, here they are.

The beginning

The friend isn’t in the crypto industry. He wanted to dollar-cost average into BTC and ETH over the next few years.

While our fiat on-ramp was Binance, I told him to move to FTX for his DCA instead. It was free to send BUSD over Binance Smart Chain, after all, and FTX would easily credit that.

While Binance is a great exchange, it was confusing to access it. There’s a whole transfer that you need to do to move assets gained from a peer-to-peer exchange into spot, where someone can finally start buying something.

My friend also had a lump sum from the beginning. It would be slowly deployed over time.

And to do any lending in Binance, that’s *another* transfer to another Binance wallet type. It all gets confusing, and it doesn’t help that these aren’t named intuitively. Spot is easy to remember, but what’s the difference between Earn and Funding?

Instead of having to always move, FTX unfortunately had all the ideal functionality in just one screen. Once my friend received the funds in his account, he could deploy the rest into lending on that same screen.

He liked that feature, so that’s where he stayed.

The end

When the FTX news broke, it was Sunday night for me. Or, Monday morning, technically.

I dismissed it and went to sleep. But then when I woke up, I had a message from another friend asking me for help getting funds out of Blockfolio, FTX’s retail app.

I’m never gonna know if I independently would have come to the conclusion on my own, but I just started moving like I was on autopilot. I liked to use FTX to borrow some tokens, but with that news, the objective was to get out.

By the afternoon, withdrawals were being throttled. And just 24 hours later, they were completely halted.

Unfortunately, again: my friend isn’t part of the industry. And unfortunately in crypto, news moves so fast that you got to pay attention or things do fall apart that quickly.

He did send me a message of a headline showing that Binance was in talks to FTX, right during the first announcement, but I was too deep in the maelstrom of trying to take advantage of the situation that it slipped my mind that he was still on FTX.

And goes without saying that the headline didn’t really convey just how bad it could be. So one thing led to another, and that led me to this.

There’s been a lot of praise for DeFi after the fallout of FTX, but honestly, I think DeFi still has to figure out what it wants to be.

Because if it was friendly for beginners, I would have advised my friend to do their DCA on-chain, not on an exchange. But gas costs, failed transactions, and a lot of other things would have made it a subpar experience.

The cost is a big hang-up, of course. I’ve tried to get creative with thinking of ways to get around it, but I don’t really have one. Even if there are smart contracts that helps pool funds together, you and I would still have to each make a separate deposit of our own into that smart contract.

Of course, there are Layer 2s like Arbitrum and Optimism. And they have been delights to use.

But they’re a delight for me, someone who knows my way around. My friend just wanted to DCA, I didn’t really see why I had to introduce bridge risks to my friend for that purpose.

There’s also currently no way to move USDC to Arbitrum from Binance. Moving to an L2 would have been absolutely redundant, so just do it all on the exchange and be done with it.

It’s not fun to realize that the blockchain currently doesn’t scale when more people use it. As an individual, it only scales as your net worth scales to justify the gas fees.

Because how does it scale when there are individual costs to even enter a social contract on chain? Whereas centralized parties can offer economies of scale the more users they get.

Of course, maybe the real question is if people should be even onboarded directly onto the chain. Maybe DAOs or other structures come along and offer financial services instead?

None of this is an endorsement of centralization or etc., just the tail-end of my thoughts about how scale could look like. And I’m an unimaginative idiot who can’t beyond how things currently are.

But it is a tough question that I like to ask, because well, I have a bias against the idea that DeFi should be about banking services.

The detour

A remark that I really loved during the FTX blowup was how NFTs have done a far better job at teaching people how to self-custody than tokens have.

Because hey, despite all of the BAYC people getting phished every other month, you do have to go through a lot of things on-chain to interact with NFTs! And I love it, because it feeds my bias.

I’m tired of the banking the unbanked mantra. There are reasons why they are unbanked in the first place, after all.

From personal observation: one big blocker that I’ve seen is that people are simply too poor to afford banking. Most banks have minimum maintaining balance requirements, but a lot of the poor don’t have money they can just park into a bank account.

So it’s not a surprise that e-wallets took off and probably did a better job of banking more people than banks ever did. They had no minimum balance required, and they still keep it free to send money to another person with the same account.

And well, that unfortunately sounds like crypto, right? There’s a certain minimum balance required to feasibly access things on the blockchain.

But here is the thing: what if the purpose of DeFi was not to address the existing financial structure? What if it was meant to run a whole alternate economy instead?

DeFi is basically the financial rails, while NFTs are the goods that are being bought and sold. Truly digital commerce, dealing in intangibles.

It’s something I’ve always been sitting on since I engaged with crypto games. Which I know is an unpopular sector at this point, but the thought still remains.

And I think that this direction is a far more interesting place to push, because it’s easy to rationalize that gas costs don’t make sense for transactions. But I think that the things that NFTs can provide, like buying status or entry into a social club, are ultimately much harder things to rationalize.

Or: people can rationalize paying money to make money. NFTs have popularized a new type of good to create, and I don’t think the experimentation ends there.

And the boundaries between DeFi and NFTs have been blurring together as well! The royalty argument for NFTs are undoubtedly a financial one, and it will affect the way that new services are created. There are DeFi companies attempting to utilize houses on the blockchain, houses that most of its owners or users will probably never visit.

Say it with me: DeFi as the financial rails for a truly digital economy.

Detour, over.

The end (of this piece)

I’m laying all this out because I’m also too scared to directly ask my friend a few things. Did I lay the risks out properly enough? Was I good friend?

I did do a surface check in, and I know they didn’t lose their life savings. So in a sense, that’s a good thing.

In another sense, though, it’s a simple yes or no question. Did my friend lose money or not?

Yes, he lost money. Yes, I feel awful about it.

But what’s done is done. It’s almost a new year, and I wanted to put this trail of thoughts to rest before I go and ask my friend the harder questions.

Hope you have a merry Christmas, and may we all get a much better new year.