Wait, wasn’t bitcoin supposed to solve that?

Jill Gunter is the co-founder of the blockchain company Espresso Systems. Previously, he was a venture capitalist focused on cryptocurrency. He started his career as a trader at Goldman Sachs.

A popular refrain among cryptocurrency advocates over the years has been that “bitcoin solves it.” But the same phrase has also become a popular meme among critics of cryptocurrencies and blockchains.

Skeptics offer this phrase in response to the overzealous cryptocurrency boosters who are trying to apply blockchain technology to everything from the origin of lettuce to social media. Those who say “Bitcoin solves it” turn a blind eye, pointing out that no blockchain will be a panacea for solving the problem.

Proponents and detractors of the cryptocurrency have questioned that statement as cryptocurrency exchange FTX collapsed last week amid revelations of misappropriation of client funds, fictitious pricing and risky bets. “Wait wasn’t bitcoin supposed to solve that?”

After all, cryptocurrency was invented expressly to counter the opaque and overcharged practices of Wall Street. The original Bitcoin white paper proposed a system that would end dependence on trusted financial institutions, reduce fraud, and protect consumers. It couldn’t feel more ironic right now.

But trusting no one is a tempting promise! According to Gallup, trust in government, the media, banks and beyond has declined steadily for decades, but all you really have to do is log on to Twitter this week and check out the chaos to see that society has a trust problem. . Not surprisingly, blockchains have captured the imagination of many with their promise to eliminate the need for trust.

And to their credit, I think blockchains and their “decentralized finance” (DeFi) applications have really delivered on that promise. Individuals can protect their crypto assets, verify the transaction ledger themselves, and even participate as custodians and controllers of the entire system. Millions of people now have to rely only on code.

These crypto users may have lost sleep this week as they watched their assets plummet in value, but at least they weren’t worried about getting access to their funds again, as they did on centralized crypto exchanges like FTX.

While FTX’s customers could not get their money back, users of major decentralized finance products such as Uniswap, Compound, and Aave gained continued access to their assets and benefited from orderly and transparent processing of their trades, transactions, and yes, liquidations. Cryptocurrency has arrived for users who hold their own coins and trade only on decentralized financial platforms. It turns out that blockchains be able reduce the risks caused by middlemen!

Unfortunately, not all crypto owners have taken advantage of these features. This is because there are huge tradeoffs.

For cryptocurrency users to reap the benefits of blockchains, they must use new and challenging products that carry their own risks. If they make any mistakes, the stakes are high and they will only have themselves to blame. The man who famously dumped hundreds of millions of dollars in bitcoin was “acting as his own bank.” As he shows us, there is a major downside to being your own bank. If you lose through your own negligence, you have no recourse, no customer support, and no one to sue.

DeFi users also take risks inherent in an anarcho-utopia (or dystopia?) where code is law. If a user makes a mistake in the address they send their assets to, it cannot be reversed. Likewise, if a hacker finds a bug in a DeFi product’s code and withdraws user funds, victims will have little protection. It’s like the ultimate “finders keepers”. Technology is still at a point where these kinds of hacks happen all the time. For many users, reaping the benefits of “trustless” systems like DeFi is not worth the hassle and risk.

Users who don’t want or need to store their cryptocurrency can do it the old Wall Street way: they can trust a custodian. Custodial exchanges not only allow cryptocurrency users to cash out and withdraw coins and tokens, but also hold users’ assets as escrow. Of course, users who hold and trade on exchanges are not really using crypto. They don’t get any of the features cryptocurrency is designed to offer, such as self-protection, censorship resistance, and transparency. They simply think or think “the number is increasing” or “the number is decreasing”.

Still, it’s fair to say that millions of users have benefited from it convenience keep their assets in these exchanges. Today, it was revealed that at least one million of those users, namely FTX users, would be better off using the cryptocurrency’s value proposition and keeping their funds.

And the sad reality is that despite offering an alternative to bitcoin and other blockchain products, the cryptocurrency market today has created more middlemen than it has eliminated. For the last few years, no one cares about the genuine utility that can be found in crypto.

With the global flood of easy money pouring into all sorts of asset classes and pushing people out of the risk spectrum, entrepreneurs, developers and investors have been tempted to play in building huge speculative bubbles rather than deliver lasting value.

Much of the time, energy, money and attention spent on cryptocurrency in the last few years has been focused on building gambling markets around magic beans instead of creating products that take advantage of the openness, transparency and autonomy that the technology offers. .

FTX and its breach of user trust serve as the starkest reminder the industry could ask for to return it to its original vision. The demise of FTX feels like the end of cryptocurrency right now, but it could be the catalyst that moves the industry into areas where cryptocurrencies and blockchains can solve real problems.

Already, many more storage exchanges have announced that they will use the transparent nature of blockchains to provide cryptographic “proof of reserve” to the public. This is a great example of using technology for its true benefit: improving accountability.

It feels optimistic in this hour of shame and darkness, but one can only hope that cryptocurrency can actually provide a more open and transparent system so that ten years from now we can look back and say: bitcoin solved it.

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