The Fall of FTX Has Revealed Web3’s True Colors

For many, the crypto world feels like it’s in shambles. The high drama between rival exchanges Binance and FTX has set the stage on which it played out fully ablaze. Over the last few days, repeated revelations have wiped out billions in funds, sent the Web3 community reeling, and irrevocably altered the future of crypto and NFTs.

It was the last thing the space needed. The dramatic fall from grace came during a community-wide effort to push back against OpenSea’s recent announcement that it would likely stop enforcing creator royalties for existing collections as of December 8. On top of that, Elon Musk’s Twitter checkmark debacle has sparked controversy in NFT circles in particular, as it’s already emboldening scammers in an entirely novel way.

How did we get here? It wasn’t wrong to feel like all was well in crypto and NFTs in recent weeks — Instagram officially became an NFT marketplace, Art Gobblers proved innovation is very much alive and well in the bear market, and Art Basel 2022 is shaping up to be one hell of an event.

The answer involves a combination of things: recklessness, centralization, corporate rivalry, deception, and harsh realities. The story of Binance and FTX is fascinating and instructive, but the real takeaway is how the Web3 community is already responding to yet another seemingly fatal blow to the market, turning adversity into opportunity.

What exactly happened to Binance and FTX?

Binance CEO Changpeng Zhao and FTX CEO Sam Bankman-Fried have a long and storied relationship. Binance, the world’s most popular crypto exchange by far, was an early investor in fellow exchange FTX and, in December 2019, invested an undisclosed amount in the company, purchasing large amounts of FTT, FTX’s native token, in the process.

However, as FTX rapidly grew to become a rival to Binance, at points surpassing even CoinBase in market share, Binance announced it sell its stake in FTX in July 2021. As such, Binance received $2 billion in Binance’s stablecoin (BUSD) and FTT as part of the exit. Fast forward to November 2, when CoinDesk detailed a leaked document claiming Alameda Research, Bankman-Fried’s trading firm, owned a suspiciously large amount of FTT. Crypto investors began to worry that much of Alameda’s $12 billion in assets were actually comprised of FTT and that Bankman-Fried’s two companies were built on a house of cards. 

Four days after that news came to light, Zhao announced on Twitter that the exchange would liquidate its FTT holdings as a part of its exit from FTX equity last year. 

In the tweet, Zhao cited “recent revelations” as the cause for the move. However, many suspect they were related to the recent revelations about Alameda’s significant FTT holdings. Those revelations also likely included the fact that Bankman-Fried publicly questioned Zhao’s legal status in the U.S. in a now-deleted tweet, in addition to Bankman-Fried’s lobbying efforts for regulatory changes that could potentially hurt Binance and other exchanges.

Regardless of the particular reason, the news tanked FTT’s price. As people began to withdraw their funds from FTX (a reported $6 billion in 72 hours), the exchange was left searching for funds to cover what was essentially a bank run. After reportedly scouring Wall Street for a financial lifeline, Bankman-Fried announced on Tuesday that he would sell FTX (apart from the exchange’s U.S.-regulated wing, FTX.us), to Zhao’s Binance. At the same time, Zhao announced the company had signed a Letter of Intent to acquire the company following due diligence.

The deal would fall through. After performing that due diligence, Binance announced that it wouldn’t follow through on the acquisition, citing reports of “mishandled customer funds” and U.S. agency investigations.

The Binance-FTX fallout

The shockwaves from this spectacular fall from grace have reverberated through the crypto markets and beyond. Apart from Bankman-Fried reportedly losing 94 percent of his $16 billion fortune in a matter of days, the FTX CEO was long considered to be one of crypto’s greatest success stories. That credibility, along with the credibility of the crypto world in general that he had helped build up in Washington, has been shattered.

The jarring speed with which this momentous downfall took place, in just a few days and lacking any red flags — even weeks prior — has dealt a debilitating blow to crypto’s economic standing and overall reputation. That it happened when people were already reeling from a bear market feels less like kicking someone while they’re down and more like hitting them with a grenade while they’re down. The responses from those in the crypto and NFT communities have been scattered and visceral, stretching from absurdly comedic, to dire, to hopeful.

Make no mistake: there will be significant fallout from this crisis. The largest 15 cryptocurrencies have lost more than $176 billion in market cap, in just three days, according to information gathered by Forbes. And these tumultuous events will only exacerbate the mental health crisis the NFT community already deals with daily. Similarly, the fear-mongering and lax journalistic standards that even major publications employ while covering the crypto and NFT world are unlikely to improve in light of this week’s news.  

And while October saw some of the biggest Web3 onboarding events the space has ever seen — with both Reddit and Warner Bros. making considerable strides in contributing to the widespread adoption of blockchain technology — the Binance-FTX saga has likely wiped out large amounts of whatever goodwill those endeavors fostered among the non-Web3-native public.

Expect stronger crypto regulation

Regulatory bodies smell blood in the water. According to the Wall Street Journal, a tripod of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) are investigating FTX on grounds related to its liquidity crunch and on suspicion of possible fraud. How these events influence the kinds of regulation these bodies (along with Congress) choose to seek or implement in the long term for the broader crypto ecosystem is unclear. However, it’s doubtful that whatever skepticism they already had harbored about that ecosystem will do anything but grow. 

None of which bodes particularly well for Web3 enthusiasts. But here’s the thing: The NFT community can take it. 

The future of NFTs rests with its community

There is plenty of inspiration in the NFT space to be found. For example, after a tense few days of artists and project teams scrambling to understand, cope with, and counter OpenSea’s creator royalties announcement, the platform has done an about-face on its decision. 

While NFT marketplaces (including OpenSea) still have plenty of room for improvement regarding this issue, the space should count this as a massive win. An enormous groundswell of discussions and collaborations in the NFT space rose the challenge of royalties potentially going to zero, and this forced the biggest marketplace in the ecosystem to alter its course on the matter. That is no small feat, and it serves as a reminder that the collective Web3 community is as strong as it decides it wants to be. Ultimately, events like this may prove to be a uniting force in space.

“I fully believe in this space and where it’s going.”

Betty, Deadfellaz

“Collaboration is a founding ethos of Web3,” said Betty of the DeadFellaz NFT project team and community while speaking to nft now about the space’s turbulent week. “But we haven’t seen enough of it so far. The beautiful thing about this week is that collaboration has really started. In a way, the conversation happened because of what OpenSea proposed. The urgency that it incited was a positive thing, despite being exhausting.”

On November 7, Betty opened her DMs on Twitter, calling on project founders to reach out to discuss the implications of what OpenSea was then proposing to do. While the platform ultimately gave up considering taking existing collections to zero percent royalties, Betty believes the news resulted in a reminder to artists and creators that they wield more power than they might realize. Far from being naively optimistic, having hope in the NFT community is the best thing people can do in the space. The key thing, she believes, is to be patient and play the long game.

“The context of Web3 and NFTs will change,” Betty elaborated. “It’s not just going to be art, it’s going to be everything. Education, real estate, healthcare. And it’s not going [to] happen overnight. I think it is healthy to be optimistic. I am optimistic. I fully believe in this space and where it’s going.”

Optics play a large role in the perception of that optimism. For the average Web3 enthusiast or collector, it might not be immediately obvious that there is actually an abundance of activity and planning going on in project circles.

“If you’re not part of the behind the scene building, you might not see what’s going on or know about the projects that are happening,” Betty clarified. “I have never been busier in my entire life. And it’s the same for every other founder of every other project I know. Despite the turbulence of the [crypto] foundation we’re built on, sentiment behind the scenes is high.”

For the NFT space to continue to move forward and flourish, it needs the kind of determination and confidence that Betty emphasized. And there’s good reason to believe her. Creatives in the community continue to drop new collections, encourage collector and fan participation, and further explore the potential that the blockchain offers them. Despite appearances, counting the world of Web3 out, no matter how dire the circumstances seem, would be a mistake.

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