Wait, wasn’t bitcoin supposed to solve this?

Jill Gunter is one of the founders of the blockchain company Espresso systems. Previously, she was a venture capitalist with a focus on crypto. She started her career as a trader at Goldman Sachs.

A popular refrain among crypto advocates over the years has been “bitcoin solves this”. But the same phrase has also become a popular meme among critics of cryptocurrencies and blockchains.

Skeptics offer the term in response to overzealous crypto acolytes trying to apply blockchain technology to everything from lettuce origins to social media. “Bitcoin solves this,” they roll their eyes, pointing to the fact that no amount of blockchain will be a panacea for the problem.

Over the past week, as crypto exchange FTX crumbled into bankruptcy amid revelations about misappropriation of client funds, imaginary brands and risky bets, crypto’s advocates and critics alike have turned that phrase into a question. “Wait, wasn’t bitcoin supposed to solve this?”

After all, cryptocurrency was invented explicitly to counter Wall Street’s opaque and handed-down practices. The original Bitcoin Whitepaper proposed a system that would end reliance on trusted financial institutions, reduce fraud and protect consumers. At the moment, this couldn’t feel more ironic.

But not having to trust anyone is a seductive promise! According to Gallup, trust in government, the media, banks and elsewhere has been in steady decline for decades, but really, all you have to do is log on to Twitter this week and check out the chaos to see that society has a trust problem. It’s no wonder that blockchains, with their promises to obviate the need for trust, have captured the imagination of many.

And to their credit, I think blockchains and their “decentralized finance” (DeFi) applications have actually delivered on that promise. Individuals can take care of their own crypto assets, audit the ledger of transactions themselves, and even participate as custodians and monitors of the entire system. Millions of people now only need to rely on code.

These cryptocurrency users may have lost sleep this week as they saw the value of their assets drop, but at least they weren’t worried about whether they would ever be able to access their money again, as they have with centralized crypto exchanges like FTX.

While FTX’s customers pulled out and were unable to withdraw their money, users of major decentralized finance products such as Uniswap, Compound and Aave had continuous access to their assets and benefited from orderly and transparent processing of their trades, transactions and, yes, liquidations. For the users who hold their own coins and trade only on decentralized financial platforms, crypto came through. It turns out that blockchains can reduce the risk posed by intermediaries!

Unfortunately, not all crypto holders have taken advantage of these features. That’s because there are big trade-offs.

For crypto users to get the benefits of blockchains, they have to use new and clunky products that carry their own risks. The stakes are high if they make any mistakes, and they’ll only have themselves to blame. The man who famously dumped hundreds of millions of dollars in bitcoin in a landfill “acted as his own bank”. As he demonstrates to us, there is a major downside to being your own bank. You have no recourse, no customer support and no one to sue if you lose due to your own negligence.

DeFi users also take on the risks inherent in an anarcho-utopia (or dystopia?) where code is law. If a user makes a typo in the address they send their assets to, there is no way to undo it. Similarly, if a hacker finds a flaw in the code of a DeFi product and extracts user funds, victims will have little protection. It’s like the ultimate “finder-keepers”. The technology is still in a state where these types of hacks happen all the time. For many users, getting the benefits of “trustless” systems like DeFi is not worth the trouble and risk.

Users who don’t want or need to hold their own crypto can do it the old-fashioned Wall Street way: they can trust a custodian. Custody exchanges not only enable crypto users to withdraw and deposit coins and tokens, they also hold users’ assets as deposits. Of course, it is not users who hold and trade on exchanges using crypto. They don’t pick up some of the features crypto was designed to provide, like self-storage and censorship resistance and transparency. They just keep or speculate whether “the number is going up” or “the number is going down”.

Still, it’s fair to say that millions of users benefit convenience of holding their assets on these exchanges. Today it turned out that at least one million of these users – namely those who used FTX – would have been better off if they had taken advantage of crypto’s value proposition and kept their money themselves.

And the grim reality is that despite bitcoin and other blockchain products offering alternatives, the cryptocurrency market as of today has created more intermediaries than it has eliminated. In recent years, no one has really cared about the genuine utility that can be found in crypto.

With global floods of easy money pouring into asset classes of all kinds, pushing people further into the risk spectrum, entrepreneurs, developers and investors found themselves encouraged to play into the construction of a large speculative bubble as opposed to delivering lasting value .

Too much of the time, energy, money and attention that has gone into crypto in recent years has gone into building gambling markets around magic beans – instead of creating products that take advantage of the openness, transparency and autonomy that the technology offers.

FTX and its breach of user trust serve as the strongest reminder the industry could ask to return it to its original vision. The decline of FTX feels like the end of crypto at the moment, but it could be the catalyst to propel the industry into the realms where cryptocurrencies and blockchains can solve real problems.

Already, many more custodial exchanges have announced that they will take advantage of the transparent nature of blockchains to provide the public with a cryptographic “proof of reserves”. This is a great example of leveraging technology for its true purpose: improving accountability.

It feels optimistic in this hour of shame and darkness, but one can hope that crypto can actually deliver on a more open and transparent system, so that in a decade we will look back and be able to say: bitcoin solved this.