Crypto’s big idea is under scrutiny

It is impossible to overestimate the extent of this The collapse of the FTX cryptocurrency exchange has shaken up not only the formal crypto industry, but also The idea of ​​encryption itself.

When news of FTX broke, it wasn’t just one company that was taking a hit. Bitcoin fell to a lowest level in two years When word got out that a possible rescue operation had failed; Ether was also hit (although both have since recovered somewhat).

This is not how everything was supposed to work.

One of the main promises of blockchain, and the supposed advantages over both the traditional internet and traditional fiat currency, is its decentralized nature. The idea – in theory – is that by storing financial records and personal data in an immutable public ledger, users will be protected from fallible third parties such as banks (or exchanges), in an “untrusted” system of complete trust.

As one might imagine, the second largest cryptocurrency exchange stopped withdrawals and crashes because their balance sheets were completely fraudulent, which puts a bit of a dent in this theory.

Some of the most vocal proponents of decentralized finance, or “DeFi” — financial products that exist entirely on the blockchain — are unfazed, and Argue that FTX was insufficiently decentralizationthus simply replicating the problems of traditional finance.

“DeFi is the only way to continue doing these types of financial services operations in the cryptocurrency ecosystem,” Michael Anderson, co-founder of Framework Ventures, insisted to TechCrunch on Friday, and the collapse of FTX “gives us hope and strengthens our resolve.”

However, it is not clear that the blockchain protocol itself prevents all risks of catastrophic events similar to FTX in the way some DeFi proponents claim.

One major area where this is already painfully obvious: security, ie Hundreds of millions of dollars in cryptocurrency It was stolen from FTX in a hack in the hours after it declared bankruptcy.

said Patrick Blumenthal, a former OnDeck venture capitalist and host “Big Ideas” podcast. “Billions are lost annually from the abuse of ‘untrusted’ protocols.”

There is also the fact that once Which The system reaches a certain scale, and centralization is inevitable to set rules and rest. Earlier this year three researchers wrote in Wired About the extent to which extreme decentralization proponents tend to miss the finer points of how and why decentralization can be beneficial in the first place.

I met one of them, associate political economist and Microsoft social technologist Divya Siddarth, in May, after else Key encryption breakdown From 2022. “An organization is a quasi-stable entity with common standards, goals and processes, which means you can’t get away from building organizations even if you try not to,” she told me then. “Crypto has a lot of institutions… Ethereum itself is an institution, and all of these L2 chains institutions, and the way they interact with each other is institutional in nature.”

This notion aligns uncomfortably with the world of cryptocurrency and especially Web3, which was born out of the revolutionary promise, largely in light of the 2008 financial crisis, that the cryptographic invention of Satoshi Nakomoto, the pseudonymous creator of bitcoin, could “solve” the problems of Greed and fraud in Byzantine and opaque institutions such as Lehman Brothers or Bear Stearns.

The nascent industry is now learning that human nature has a way of stubbornly interfering in all public affairs, be it technological or otherwise. FTX collapsed not because of a bad contract or technical glitch, but because Bankman-Fried and company made the decision to base their reserves on a self-issuing token that was worth nothing.

When a rival crypto mogul exposed this, the crypto community collectively and meticulously decided that FTX itself was worth nothing, and Bankman-Fried’s vast fortune disappeared overnight. This is less different from what happened to Bear Stearns than the crypto-world would like to believe.

The European Union is preparing to finalize The text of its AI bill.

Politico’s Gian Volpicelli and Laura Chiali Reported to Pro subscribers This morning, according to a document they viewed, the Czech Presidency of the Council of the European Union sent its final changes to the bill including “more exceptions for micro and small businesses to the bill and assurances that only health and life insurances should be covered by risk assessment and pricing rules.” among other things.”

It may sound wonky, but the lengthy process of amending the draft text reflects an ongoing dialogue between EU regulators, industry groups and campaigners. This, one might imagine, creates quite a number of points of tension: activists and some academics already believe, for example, that industry groups had too much say in the process, while those groups argue that it is impossible to grasp a technical fact well enough. to organize them without their input.

And when — unlike a voluntary US AI best practice framework released this year — these rules do have actual legal effect, expect these discussions to continue to flourish and intensify as the law actually goes to the European Parliament.

What does a closely divided congress mean? to innovate in America?

With Democrats narrow control of the Senate, and what currently looks like an equally narrow Republican control of the House of Representatives, it’s likely to be more the same than a couple of years ago: policy on forward-looking technologies like quantum computing and artificial intelligence at least has Ability To be a rare vehicle for bipartisanship.

“Policy shifts are happening downstream of the shift in attitude toward China,” Will Reinhart, a senior fellow at Utah State University’s Center for Growth and Opportunity, told me last week. The midterm elections are likely to make the China issue more prominent in the next Congress. In fact, if, as expected, the Republicans take over the House, these emerging technical issues may become the only place where compromise can occur.”

Still, it sounded like a warning about something largely out of lawmakers’ control: the economy. With the Federal Reserve keeping interest rates high for at least the next year, “a lot of companies are going to face stress,” Rinehart said.

“As much as everyone talks about technology penetration and exuberance, the investment environment is getting tougher,” he said. “I’m not sure exactly where this leaves us, but I can’t imagine it being a good thing.”

Stay in touch with the whole team: Ben Schrekinger ([email protected]); Derek Robertson ([email protected]); Steve Houser ([email protected]); And the Benton Ives ([email protected]). Follow us @employee on Twitter.

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