Lessons we learned from the Terraform-FTX implosions

Published at: Dec. 10, 2022

In May 2022, Terraform Labs’ LUNA cryptocurrency and TerraUSD (UST) stablecoin collapsed, triggering a massive shock in the crypto industry. Six months later, the bruised industry took another hammering as one of the largest cryptocurrency exchanges, FTX, filed for bankruptcy protection and billions of dollars of user assets went missing. The FTX empire, once valued at more than $30 billion, fell to zero in fewer than 10 days.

FTX reportedly has more than 1 million creditors, most of whom are retail investors who were convinced that FTX would not collapse and had been keeping their assets on the exchange. Taking a look at Mt. Gox in 2014 — whose creditors still failed to reclaim compensation — FTX may be a repeat of that mistake.

It can be said that FTX succeeded because of Alameda Research, and failed because of Alameda too. An investigative report led careful users to uncover serious problems with Alameda’s balance sheet, which then led to a deeper dive into its unclear, unexplained financial dealings with FTX.

Many well-known venture capital and crypto companies have also been caught in the trouble. Sequoia Capital, Temasek and others announced that they were making their investments in FTX down to zero; BlockFi, a crypto lending platform, has filed for bankruptcy due to its exposure to FTX; and crypto broker Genesis, a subsidiary of Digital Currency Group, is on the verge of bankruptcy due to a liquidity crisis and may not be able to repay investors’ funds.

When the crypto tide ebbed, we knew who was swimming naked. After the craze, the market is left in a mess.

The collapse of FTX provides a precious opportunity for all users, practitioners and lawmakers to reflect on the problems and reinvent the crypto industry.

I don’t think we should blame the FTX failure on cryptocurrency itself. It doesn’t mean that the emergence of Bitcoin (BTC) and the crypto industry was a mistake. We should be thinking about the business models that cryptocurrency exchanges run and how to effectively decentralize governance, etc.

The overturned cart ahead is a warning to the ones behind. The implosion of exchanges is mainly attributed to their untransparent funding disclosure. We have seen that the top cryptocurrency exchanges — including Binance, OKX and Huobi Global — have announced their fund reserves to prove their security to ensure the interests of users.

The shock of FTX’s bankruptcy still needs much time to be digested, and the crisis will not stop here, but I believe in the unstoppable bursting momentum of the crypto industry.

The crypto industry has its twists and turns as it develops, but its future is promising. While 2022 is a particularly tough year for the crypto space, it will continue to grow, evolve and look for a way out amid the skepticism.

With the COVID-19 pandemic raging and the global “rate hike wave,” the crypto winter could be harsher and more prolonged than expected. Although we cannot precisely predict and estimate how long it will last, we can get over the difficulties together.

As a journalist who has worked on the front line of the industry for many years, I have learned some deep lessons from the LUNA crash to the FTX collapse:

If you hear any rumors about the insolvency of an exchange or a project, be sure to transfer your assets out as soon as possible. As an old Chinese saying goes, a true man won’t stand beside a collapsing wall.Not your key, not your coins. This is a cliche, but it is also a truth. The only way we can protect our crypto assets is by keeping our own private keys.Cash is king when a crisis occurs. As bubbles burst and asset prices plunge, holding cash can make us safely survive the difficult period.Don’t borrow money to invest, and don’t leverage. For most people, borrowing and leveraging will only accelerate bankruptcy. FTX was not immune to this.Keep up with the industry by learning new things about centralized finance and decentralized finance, tokenomics, on-chain activity, how to use cold wallets, etc.

Personally, I am a crypto enthusiast and supporter with a long-term vision for blockchain technology. The crypto industry has faced its darkest hour more than once. There’s no making without breaking, and I hope we can regain our confidence and trust in the industry.

After the FTX accident, Cointelegraph Chinese was the first to organize several Twitter Space conversations, inviting crypto veterans to discuss the impact and lessons of the collapse.

As a platform, Cointelegraph Chinese hopes to present the most timely, high-quality crypto news to Chinese-speaking users so as to help them grow.

In addition, Cointelegraph Chinese is always committed to helping and guiding crypto users to establish correct and scientific values while promoting the further development of the crypto space and Web3.

Finally, a classic quote from the great philosopher Friedrich Wilhelm Nietzsche for those who continue to build: “What does not kill me, makes me stronger.”

Tracy Zhang is the CEO of Cointelegraph Chinese. She graduated from Zhengzhou University before attending Paris-Sorbonne University for French Studies.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.