The Crypto Community Responds To FTX Crash By Taking Back Control
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Even by crypto’s highest standards, the last few weeks have been some of the most painful that the industry has ever endured. What was formerly one of the world’s most respected and trusted cryptocurrency exchanges, FTX, collapsed into bankruptcy amid a rush by customers to get their savings out of the platform after rumors emerged that it was basically insolvent.
The result - thousands of crypto users once again out of pocket, to the tune of thousands of dollars in some cases.
To be sure, many crypto exchanges have failed many times in the past, but the sheer scale of mismanagement witnessed at FTX appears to be unprecedented. It owes its users billions of dollars, and those creditors have little hope of seeing it returned. As a result, many people have lost faith in crypto, resulting in heavy downward pressure on token prices.
Investors should realize however that crypto itself is not flawed, and its blockchains didn’t fail. Rather, the collapse of FTX was the result of human mismanagement, incompetence and, most likely, fraud. Investors’ losses could have been avoided, and would have if they had followed one of crypto’s best practices.
Self-Custody Is Sacred
One thing that’s often forgotten by many of its users is that cryptocurrency is designed as a bearer asset. In other words, users are required to safeguard their funds by themselves. It’s solely their responsibility. There are no banks in crypto, there is no insurance and no comeback if something goes wrong. Users have to remember their private seed phrase and keep it somewhere safe. If they don’t, they risk never being able to access their funds again.
When someone chooses to store their funds in an exchange wallet, they’re not in control of that seed phrase. The exchange is therefore in control of the funds, not the user - which is something that goes against the very essence of crypto. If you keep funds in an exchange wallet, such as with FTX, you’re basically using that exchange as a bank. The only difference is that, unlike banks, exchanges are not insured or covered by government guarantees and therefore cannot be trusted.
This is why self-custody of crypto is sacred. The only way to ensure you can access your funds is by keeping them within a wallet that you control. It’s called a “non-custodial wallet” and it means creating and storing a seed phrase. So long as no one gains access to this private key, it’s impossible for anyone to steal or misuse your funds in any way.
Users Flock To Non-Custodial Wallets
Non-custodial wallets have gained a lot of attention in the days since FTX collapsed. For instance, the token of non-custodial wallet provider SafePal, SFP, saw its value jump by 125.96% in the week after FTX filed for bankruptcy. Similarly, the value of Trust Wallet’s TWT token rose more than 92%. These sudden gains suggest a large influx of users moving their funds from exchanges into non-custodial wallets, where they can be sure they are safe.
This is good news for the crypto industry but also creates an additional level of complexity for users. With a non-custodial wallet, the user alone is responsible for the security of their funds. Should someone misplace their seed phrase and then lose the device on which their wallet is stored, they’ll likely have to say goodbye to their funds forever. Crypto isn’t like a bank where you can just walk into any branch and prove your identity to access your account. If the seed phrase is lost, so are your funds.
Smarter Investors Seek MPC
Creating and securing a non-custodial wallet requires a degree of technical expertise, not to mention responsibility. But not everyone has that skill or can trust themselves to keep their seed phrase safe. Hence, there’s been growing interest in the newer concept of the MPC wallet.
A multi-party computation wallet is much like a non-custodial wallet, only it’s safer because it doesn’t require that the user write down and store a seed phrase. The private key is still generated, but it’s obscured from the user behind a layer of cryptographic tech, enabling them to recover their wallet through a combination of email access, facial recognition technology and a smartphone application.
MPC technology has been popular for some time. Fireblocks, the crypto custody firm that raised a cool $550 million last January, offers an enterprise grade service for institutional investors that uses MPC to shard private keys for the safekeeping of valuable digital assets. The popularity of its service has risen sharply, with Fireblocks increasing its client base from 150 to more than 800 by the end of 2021.
Then there’s ZenGo, a consumer-focused MPC wallet that claims to have seen a 230% increase in new wallet users, and a 375% increase in asset deposits, since the collapse of FTX. Other names are getting involved too. Earlier this year, Coinbase announced the launch of its first MPC wallet, with the promise that users will always be able to recover their funds, even if they lose their device, with the help of its live support service.
From CeFi to DeFi
The belated shift to self-custody in the crypto space is evident in other areas too, most notably DeFi. The year 2022 has been an especially traumatic one for crypto. Even before the FTX debacle, there were the high-profile crashes of “crypto banks” such as Celsius Finance and Voyager Digital, which similarly filed for bankruptcy. Those companies provided a yield generating service, where users deposited assets with them and slowly accumulated interest on those deposits. However, these centralized finance firms operated without the same regulation seen in traditional banking, and their failures resulted in the complete loss of customer’s funds.
In the meantime, alternative decentralized platforms have benefited from their demise. DeFi is a bit more technical than CeFi, but it provides the same kind of interest-generating benefits for users who’re looking to invest their crypto assets. The main difference is that there’s no need for users to trust a third-party (CeFi platform) to safeguard and manage their assets. With the disasters at Celsius and Voyager fresh in mind, there has recently been growing interest in tokens tied to DeFi platforms. A recent report from Delphi Digital showed that its DEX basket of tokens was up by 24% on Nov. 11, while its equivalent CEX basket had declined by 2%.
The Real Promise Of Crypto
These trends suggest that the crypto community is slowly learning its lesson, even if it had to do so the hard way. As centralization fall by the wayside, decentralized platforms and self-custody of assets is in full ascendancy as the community looks to benefit from the real advantage of crypto - the promise of true financial independence and freedom from censorship and control.