Details on the FTX scandal are still emerging, but here is a high level overview of what we know right now:

FTX's collapse is unraveling itself as one of the biggest scandals in financial history. Questions continue to emerge, but most interestingly is where do we go from here? Does cryptocurrency have a future?

The problem in this spectacular blow-up was not cryptocurrency itself- it was centralization, particularly unregulated centralized organizations. For this, there are two solutions: Regulation and DeFi.

As cryptocurrency gained popularity, the calls for regulation from politicians and business leaders alike have heightened. Cryptocurrency is known to have its fair share of scams, and many believe there should be more levers in place to protect consumers and investors.

In traditional finance, financial institutions are regulated to the point that institutional risk, i.e. the risk you take when giving your money to a specific financial institution, is minimal. However, the crypto companies that are collapsing, like FTX, BlockFi, and Genesis are all minimally regulated and lack transparency. In the past, trust alone was what kept people depositing their funds into these institutions.

Cryptocurrency does have some level of regulation in the United States. Namely, it is difficult for retail traders to trade crypto derivatives on centralized exchanges. The SEC, Treasury, and CFTC all have a say in how cryptocurrency is regulated based on their fiat analog. The SEC may consider a crypto a security if it passes the Howey test, the Treasury may see stablecoins as a form of currency, and the CFTC wants to have a say in different derivative products.

Internationally, cryptocurrency is on a spectrum of either heavily regulated (like China) or very lax, like Estonia. One thing shared by all nations is a lack of clarity on how user funds can be used. This pushed companies like FTX offshore, where standards became even more opaque.

Earlier in the year, cryptocurrency exchange Voyager Digital filed for bankruptcy due to their loans to Three Arrows Capital (3AC) going into default. Voyager Digital was an extremely popular exchange that offered high interest-bearing crypto deposit accounts. In order to generate these high yields, Voyager took out a long chain of risky investments and loans behind the scenes.

Even though Voyager Digital had 3.5 million users, 97% of whom held  deposits less than $10k, all it took was one counterparty to go under to undo the exchange. When 3AC failed from the TerraUSD collapse, over $666 million of loans remained unpaid. While $270 million of customer funds were recovered, this is merely a fraction of the losses customers faced.

Along with Voyager and 3AC, Celsius, Babel Finance, and now BlockFi have filed for bankruptcy or have begun restructuring, primarily due to counterparty risk. While all financial institutions– crypto or fiat– are exposed to counterparty risk, the nail in the coffin for these companies was a lack of transparency.

If you were a customer at any of the above companies and deposited crypto to earn yield, there was no real way for you to understand where your funds actually went. Furthermore, there was no way to tell how solvent each financial institution actually was. There is no FDIC insurance for crypto exchanges, so you had to trust that the company was going to be able to pay you back in a timely manner.

If centralized cryptocurrency companies like BlockFi and Celsius are to reappear in a new form, there must be regulation that improves transparency and creates clear guidance on custody of customer funds. Customers have a right to know who their coins are being lent to, and the overall financial health of the company taking their deposits.

Many of these companies assured customers their funds were safe due to their sophisticated risk systems. However, customers were not allowed to know any details about how these companies hedged their risk. Information around the loans being given, the value of the collateral, or other financial data points was all considered private business information.

Needless to say, when BlockFi, Celsius, Voyager, or any of the other large crypto lenders went under, it was revealed that these loans were actually pretty poorly collateralized, and concentrated around one or a few counter-parties. Had customers known that their funds were going to be used for such risky lending, they likely would not have invested in the first place.

Arguably the most transparent cryptocurrency exchange is Coinbase. Because they are a public company, they are required to file SEC-compliant financial statements which gives anyone a deep look into their financials. While it is possible for public companies to hide financial wrong-doing, it is much easier to do your own due diligence with audited and trusted financial statements.

In a twist of irony, SBF, CEO of FTX, was one of the biggest proponents of further crypto legislation. However, it is starting to look as if his push for regulation was for the benefit of his company- SBF was one of the biggest advocates for regulating Decentralized Finance, which was technically an industry that competed against FTX.

By depending on regulation to help curb industry-wide meltdowns like we see today, we are putting the future of cryptocurrency in the hands of legislators who can be influenced to favor certain policies. Instead of building a neutral, equitable, and trustless financial future, crypto will become just another risky asset to invest in.

Of all the crypto companies listed above that have gone under this year, none of them fell apart because of blockchain technology or a fundamental aspect of crypto. The problem in this spectacular blow-up was centralization, particularly unregulated centralized organizations.

The entire point of cryptocurrency is to create a trustless financial system: You do not need to trust counterparties in transactions because the technology makes it impossible for fraud to happen. A public ledger, when implemented correctly, is transparent and infallible.

Over the past few years, people have taken their tokens that were made to be trustless, and given them over to centralized institutions with no recourse but trust. This is the antithesis of cryptocurrency!

Decentralized Finance utilizes smart contracts and various cryptocurrency blockchains to create a true, trustless financial system. This allows for Decentralized Apps (DApps) like exchanges and yield yarming platforms to operate without the need for a central authority. Not only that, protocols are completely transparent and democratic in their decision making.

For example, depositors were attracted to Voyager Digital and Celsius because of their high interest rates. However, there was no transparency into where the funds were being lent, and depositors really had no control over how their funds were invested.

In DeFi, users can deposit their crypto into a liquidity pool to earn interest. Each liquidity pool operates under a specific smart contract that is available for everyone to view. How much you earn, where your funds go after depositing, and when you can withdraw your funds are all hard coded into the smart contract. Institutional risk is nearly erased due to technology behind smart contracts.

This could be applied further with exchanges. While many centralized exchanges are easy to use, they are very susceptible to fraud and insolvency, Decentralized Exchanges (DEXs) are universally transparent. Anyone can go into the smart contracts that power the exchange and see exactly how it works.

In every example of DeFi, there is no one central authority that could be the point of failure. The entire point of Bitcoin and greater cryptocurrency space is to remove the need for a central authority. This is accomplished in DApps.

A popular axiom in the crypto community is “Not your keys, not your coins”. This is referring to self-custody, or the lack thereof when using many crypto companies. Self-custody is the idea that you have ultimate control of your money (in this case cryptocurrency) through the use of a wallet. While some centralized platforms are now offering wallets that are self-custody, most users are simply storing their crypto in the platforms’ native accounts

In order to use services from a company like BlockFi, you have to give your crypto to a trusted authority. Though it is under “your account”, the company is the custodian of the coins, meaning it could be impossible to recover these funds should something happen to the company.

The only way to use DeFi is by using a crypto wallet. There is no way to make an account in a traditional sense on a DeFi platform. When using a wallet, you are the only custodian of your coins, meaning you have control over what happens to them. No more storing coins on exchanges with the fear of losing them due to institutional risk.

While DeFi is ultimately the best solution to many of crypto’s current issues, it isn’t perfect. DeFi adoption continues to grow, but DeFi protocols have only a fraction of the volume that many of the large centralized exchanges boast. There are a few reasons for this, mainly due to the lack of convenience with using DApps.

One of the reasons centralized exchanges became so popular was because of how easy they made it to use and invest in cryptocurrency. For exchanges like Coinbase and Gemini, it made buying crypto as easy as buying a stock on Robinhood. Self-custody is not the most straightforward concept, and for many simply opening a wallet is too complicated.

DeFi applications take it a step further. Many DeFi applications use terms and concepts that make it difficult to understand unless you are a seasoned vet in the crypto space. People understand earning interest in a savings account. Not everyone is going to understand the different metrics involved with depositing into a liquidity pool.

Additionally, there is still a risk of DeFi scams on the market. While DeFi contracts are infallible once coded, there are ways to create purposely fraudulent smart contracts that cause users to lose their investments. These are getting pushed back and exposed by much of the web3 community, however it still is a risk to investors, especially if you do not understand how to read the code of a smart contract.

It should be kept in mind though that these problems are only temporary. As DeFi adoption continues to grow, and technology develops, it will become easier for new users to adopt DeFi applications. For example, one of the biggest push backs against self-custody was the lack of convenience and difficulty to track investments. Metamask has launched a portfolio dashboard, making managing DeFi investments as easy as a centralized platform.

Crypto today is far easier to use than it was even 2 years ago, and there is no reason to expect innovation to slow down.

In the wake of FTX’s collapse, many are saying that this is the beginning of the end of the wild west of investing that is cryptocurrency. Lenders like BlockFi and Celsius were able to offer high interest rates for customers due to opaque and risky investments. However, it is increasingly likely that regulators are going to put an end to these companies’ ability to lend customer funds in such a way. This is arguably great for the industry, though, as this is the antithesis of why cryptocurrency was created.

Bitcoin launched in 2008 as an alternative to the central bank fiat system, and from there the basis of a decentralized financial system was born. Using this foundation, cryptocurrency has evolved over the past 15 years into more than just a digital currency. With many centralized cryptocurrency companies failing, the industry will become refocused on decentralization, and for the better.