The financial pain caused by FTX was exacerbated by clients using the exchange as a custody platform. FTX offered a robust spot trading platform with derivatives and leverage but was mistakenly also used as a trusted custody solution. The industry has already experienced similar consequences of using an exchange for custody when the Mt. Gox exchange was hacked in 2014. As an industry we cannot afford to repeat this mistake again, conflating a custody platform with a trading platform. To contend that having proper regulation is the solution, might help prevent fraud from repeating itself, but won’t guarantee it. Look at Enron, Madoff, and many others, which were all regulated. Unfortunately, fraudsters can outmaneuver regulators, leaving them one step behind.
Exchanges are now preemptively discussing public asset disclosures, called proof of reserves, to assure the public there’s a 1:1 asset backing. The umbrella network, a decentralized oracle application, recently published an article describing a solution using Merkle sum tree and ZK-snarks.
What if we didn’t need this proof and redesigned the space using crypto technology? A solution that truly incorporates crypto properties of self-custody and a trust-less trading environment. In fact, all these pieces of the puzzle currently exist but are fragmented with a poor user experience. The industry needs a retail platform to combine it all, offering a robust onramp, trading, lending, and borrowing, all using trustless technology. It could use circle financial as an onramp, where USDC would be deposited into a client’s self-custody wallet. Clients will have access to vetted decentralized exchange pools, allowing users to trade in a trustless manner. The only centralized trust required is temporary with USDC at circle financial, which is one asset, and is not a market maker, nor an exchange, or a VC firm. Its operations are clear and audited and can utilize the Merkle tree for proof of reserves. I believe moving in this direction would restore a lot of the lost trust, and allow this space to rapidly grow amidst weak guidance from SBF’s associate Garry Gensler.
Maybe this product is already under development, nothing would make me happier. A sat for your thoughts?
