One thing, well there are thousands, but one thing traditional finance does far better than crypto as the above quote points out, is separation of duties.
Exchanges, allow for trading.
Clearing houses handle settlement.
Back offices/prime brokers handle custody of assets and margin allocation for those that want to trade on margin
Government and self regulating agencies handle compliance and oversite.
This means that when there is a failure at one of these, the rest go on mostly unaffected.
FTX was handling trading, settlement, holding of customer funds, margin allocation/loans and regulation.
So when FTX failed/was found out as a fraud, the entire thing went belly up.
Crypto will get there with separation, its considered a best practice, but it takes time for people to realize why traditional finance is structured the way it is.
The one retort you may come up with is that the major sell side institutions do alot of these, but you'll also be aware that they are very securely firewalled away from each other.
Some sell side institutions own their own trading venues, but they are ran as arms length separate companies.
When Lehman went bankrupt no one who primed with them lost their shares held by Lehman as those were firewalled away from Lehman's trading business and Lehman couldn't touch them to cover its own losses.
In each collapse we learn new lessons. In this latest crypto crash we learned a few things:
1) that you can't give unsecured loans to even the most blue chip of names( 3AC in this case) as everyone can go bankrupt, defi has seemed to learn this lesson and weathered the storm well
2) everyone was essentially doing the same trade, either piling into USDT's 20% farming premium or in the case of sell side institutions like Celsius, just lending out customer deposits to the big hedge funds. And when those trades stopped working, everyone lost their money at the same time and tried to recall their loans at the same time.
3) Exchange tokens are garbage. They have value as long as the exchange is going well, but as soon as the exchange has even the tiniest bit of trouble, they go to zero. And every exchange will have troubles at some point, even if they are well run and in no way fraudulent.
Exchange tokens, not even once.
4) Crypto is big enough to be called its own asset class now. That's great, but just like traditional finance's asset classes, there is no such thing as diversification in a single asset class when the entire asset class is going down.
or put another way. You can't have a portfolio of crypto only holdings and say you are diversified as there is no such thing in a bear market. You need to diversify across multiple asset classes if you want to preserve wealth
From the perspective of most technical people in crypto, FTX was traditional finance. Traditional finance doesn’t run on-chain, and you have to trust the people running it. See FTX and Coinbase for an example.
In opposition to traditional finance is decentralized finance. Decentralized finance is implemented via smart contracts and cannot steal your money. See uniswap for an example.
There’s a gray area in the middle with things like Tether, USDC, and rollups like zkSync where the creators have a privileged key that allows them to steal all the money deposited into it.
This sounds very good until you realize that “DeFi” also can’t receive or send you actual dollars or euros — the thing that people actually hope to get out of these trades. It can’t steal your money because the money to steal isn’t there.
So the toy financial system remains just a toy, and you’re at the mercy of such high-quality operators as FTX, Binance and Tether to get any of your profits out one day. Good luck.
IMO Levine’s article is too forgiving on this point when he writes that DeFi looks pretty good after the crash. Well, duh, it’s just a sideshow in the great crypto retail circus; a hall of mirrors to keep you busy while the exchanges pick your pockets.
I see your point but I'm having a hard time figuring out how Tether is anyway different from FTX?
Both require trusting someone else and both have off chain components to how they work, it seems like a distinction without a difference here.
Can you add more colour as to how those are different because I can easily see how they are very similar?
I think the difference between traditional finance and FTX is the oversite piece and the separation of duties piece.
Traditional finance places a large roll on oversite and compliance to the point where people complain about all the rules and regulations that have been built up to protect people, and to be fair to allow government oversite.
FTX had no oversite and therefor its hard to lump it into traditional finance as compliance and oversite are bedrock must have pieces of traditional finance.
Also as was my main point, traditional finance requires separation of duties, given that FTX had none of these, its very hard to call it traditional finance without destroying the meaning of the term or watering it down so much that its meaningless.
I'm not sure this is true. Crypto is certainly a big pile of assets, but it seems (to my non-expert eyes) to be an amalgamation of corporate bonds, stocks, futures contracts, etc, all traded on a special platform. Does the platform make a DeFi governance token fundamentally different from common stock? Or are these assets just extra sketchy members of existing asset classes?
You do have a point that crypto assets are vulnerable to total ecosystem collapse across asset classes, but that would also be true for assets originating from a single country (e.g., if the UK or Japan somehow collapsed overnight, I would expect that to impact all assets from that country).
I'm not sure the term for 'doing things known to be reckless, unethical, illegal or all three with other people's money' is 'learning'.
Obviously, crypto is pretty much wall-to-wall criminality, but sometimes someone looking to ride the coattails of that might actually be sincere in speaking of it like it's a legitimate institution, because they want it to be.
IMHO, HN should stop humoring it, and consider outright banning advocating a criminal enterprise.
No, it won’t.
Crypto is solely, and entirely, a means to commit crime. Some of that crime is “OK” like evading currency controls in places we don’t like or buying drugs we think should be legal. The rest is normal kinds if crime.
It’s not an asset, it has no productive value whatsoever.
Nobody is going to learn anything except “wow that was fucking stupid we shouldn’t do that again” and then all the people who learned that will die, and then we will, in fact, do it again.
Investment scams are literally as old as the concept of investment.
Every ounce of energy and mental effort spent on crypto will be wasted.
But the underlying tech is useful and will make its way into traditional markets.
From the "Jack and the Beanstalk" entry about the story at Wikipedia:
"""Outwitting the giant, Jack is able to retrieve many goods once stolen from his family, including a bag of gold, an enchanted goose that lays golden eggs and a magic golden harp that plays and sings by itself. Jack then escapes by chopping down the beanstalk."""
