The Great Purge: Removal of FTX and the Rise of Web3 | by David S. Bennahum | November 2022

A new era arrives in cryptography

SBF in better days?

The sudden dramatic collapse of FTX in the last week puts an end to a culture of self-deluded and self-congratulatory self-enrichment as the center of the industry widely known as “crypto”. So be it.

While a purge of bad actors is a positive development, the collateral damage of the FTX collapse is severe in the short term: it paints an entire emerging “blockchain” or “web3” technology as a front for greed and corruption.

At this time of disgust over the selfishness and greed at the heart of the FTX affair, it’s worth stepping back for a moment and taking stock of the good, the bad, and the ugly in the cryptocurrency industry. Distinctions with a difference.

Let’s start with the bad. Simply put: “greed and corruption thrive in darkness.”

Crypto, an industry forged in the aftermath of Lehman’s collapse in 2008, itself a kind of “dark corruption” involving the opaque securitization of subprime American mortgages magically turned into “principal” securities, became a magnet for same corrupt and dark practices.

Greed and corruption in cryptocurrencies manifest themselves on two levels:

  • A flight to operate projects outside of supposedly “unregulated jurisdictions”.
  • The obfuscation of a project’s value by erecting a confusing wall of crypto jargon that is impenetrable to most people.

In the case of FTX, the puzzle pieces fall into place:

  • “Off shore” “unregulated” featured as a winning product feature, in this case, the Bahamas.
  • Blah blah blah cloud over FTX innovation, in no particular order – lots of financial jargon with salty crypto adjectives for extra POP! (Source), such as
  • The type of collateral required differs depending on the contract being traded (for example, Ripple’s perpetual exchanges require XRP to be posted as collateral), resulting in the principal being divided into many different tokens.
  • FTX derivatives are settled in stablecoins and share collateral in a universal margin wallet.
  • FTX futures are standard rather than inverted.

Lots of hand gestures in the 3000 word “white paper” not to mention a single engineering-based technical innovation. Instead, it’s all Wall Street “securitization” jargon – the stuff that powered Enron, Bernie Madoff and now FTX.

But a few bad actors and many more people who bought into the narrative they crafted should not undermine or outweigh the overall good that decentralized systems have the potential to achieve.

It is important to note the unique innovations at the heart of the blockchain and recap why they remain of central importance to the future of the Internet:

smart contracts

The idea of ​​enshrining “in code” a legal agreement between entities (people, companies) that itself exists independently of any central authority, but can be trusted and enforced, is a game changer in terms of Internet capabilities. What makes the contract “smart” is its nature: it does not depend on a specific “host” to be validated. For example, a seller and a buyer on eBay enter into a contract: the buyer buys a lamp from the seller. The enforceability of the contract rests with eBay as a marketplace.

In the age of smart contracts, eBay does not need to exist for the buyer and seller to interact through the contract. This is revolutionary at scale because it eliminates the so-called “middle man” and his “acceptance fee.” That, in principle, translates into a more efficient marketplace which undermines the trend of winner-take-all web2 economies, where one market comes to dominate a sector (eg Amazon).

Distributed Ownership

Utility tokens affiliated with a distributed service (as opposed to currency tokens like Bitcoin) are a powerful method of create fractional ownership correlated to the use of a product or service. People who use a tokenized software service become part owners over time, not by investing money in or buying the underlying token, but by “earning” it through agreed efforts that trigger tokenized rewards. These agreements that dictate the token reward mechanisms are enforced by smart contracts, which distribute rewards instantly when agreed actions by the user are fulfilled.

The network effects of distributed ownership are very powerful: a large workforce aligned on a common mission gains ownership through their collective participation in the offerings of a product/service, which in turn advances that product/service. service through its use. This is potentially far more powerful—and revolutionary—than the current centralized model of a small executive team, funded by equity sales to investors and revenue, building a service or company. The distributed property earned by labor is the only method with a plausible chance of outperforming the world’s largest web2 incumbents such as Amazon, Facebook and Google.

“Trustless Transactions”

The combination of a peer-to-peer method of validating transactions, smart contracts, without a centralized authority putting a stamp of approval on the end result, is the method by which distributed ownership and the contracts behind them can scale. indefinitely.

By taking a core of technology developed in the “file sharing” era and turning it into a distributed (not centralized) method of validating cryptographic transactions, the so-called “blockchain,” laid the foundation for a fundamental reorganization of how the Internet works. This has evolved over the last 20 years into a series of cloud computing “central nodes” controlled by a handful of companies: Google, Amazon and Microsoft.

Ironically, this de facto centralization of the Internet is antithetical to the original architecture of the Internet as a distributed (decentralized) peer-to-peer network. For example, it was claimed to have survived “nuclear war” through its essential decentralization. Inter-node packet switching (TCP/IP) was the major innovation enabling massively decentralized networks at scale. Trustless transactions point to a return to the decentralized core DNA of what made the Internet successful in the 1990s versus a centralized network (eg AOL).

The rise of true utility tokens

The first phase of crypto, let’s call it the libertarian/corruption axis, ended with FTX and the stablecoin crashes earlier this year.

What remains is the “web3” axis: generally speaking, web3 projects are He is not interested in financial speculation but in innovation in software services using tokenized economy.

The new phase is one in which distributed software-as-a-service solutions will be created, using the previous trifecta: smart contracts, distribution, ownership, trustless transactions. the main recipient of investment capital for the next two years.

Those who are successful will demonstrate value by scale to sizes that threaten established web2 services through decentralized methods of growth with which these centralized entities cannot compete effectively.

So what happens next?

  • “Momentum” Crypto Investors Disappear.
  • The remaining projects are increasingly choosing to enter regulated jurisdictions, Embrace monitoring as a feature, not a bug!
  • Long-term venture investors replace the crypto momentum sector as the main source of capital.
  • Only projects with significant technological innovation receive investment dollars.
  • The rise of real utility tokens with circular economies erodes the incentives of speculators.

Build in the face of disruption

Here at Ready, the company I lead and co-founded, we are building the leading ecosystem of mobile distributed web3 games backed by a utility token called $AURA. Our partners: Bitkraft, Hashed, IOSG, Fundamental Labs (for a full list visit our site) believe in our mission to enable the transition from web2 to web3 gaming (this two-minute video explains the Ready vision).

Along the way, we made some basic decisions that all web3 projects should consider. These ensure a good night’s sleep:

  • Keep your working capital in a bank account.
  • Do not “leverage” any working capital by engaging in “trading.”
  • Use working capital to build.

Ready has no exposure to FTX or its interlocking hedge fund Alameda. Ready also had no exposure to Luna, Terra or any other currency.

General advice to all builders who have raised working capital from partners: don’t use that capital for anything other than building. Don’t try to get any “return”. You are in the business of creating innovation, not investing other people’s money.

Innovation eats its own

Going back to IBM in the 1930s with the first scale “calculating machines,” computer-driven technology has a way of acting like a perpetual disruption machine. The current crop of web2 incumbents have done a masterful job of anticipating the next evolutionary cycle through titanic public market capitalizations and strategic lobbying that thwarts regulatory attempts to reduce monopoly power. That dam can only hold so long…

Web3 is a hurricane building force in warm waters – it will sweep away what was there before, clearing new land to build on.

Are you ready?

Leave a Comment