FTX’s downfall will heighten the need for regulation but also pique long-term interest from venture capitalists looking to invest in decentralized finance (DeFi), according to Michael Anderson, co-founder of Framework Ventures.
“It just seems obvious that DeFi is the only way that we can continue to do these types of financial services operations in the crypto ecosystem,” Anderson said to TechCrunch. “It gives us hope and strengthens our resolve that the things we’re pushing for are the right things to be working on.”
In April, Framework Ventures launched its third fund at $400 million, with about half of it earmarked for web3 gaming. Anywhere from half to 70% of pitches the firm gets are gaming-related companies, Anderson said. But the recent situation with FTX has the firm “doubling and tripling down on everything we believe in,” which includes DeFi and regulation of centralized finance (CeFi).
While some firms like Multicoin have seemingly lost capital stored on FTX’s crypto exchange, Vance Spencer, co-founder of Framework Ventures, said the firm had no exposure.
“Regulation is not something we should be against or preventing,” Anderson said. “Sensible regulation makes sense and now that [former FTX CEO Sam Bankman-Fried] has been removed from the table, we can move forward and get more vocal about centralized finance versus DeFi and the pros and cons of each.”
Bankman-Fried was well known for his crypto lobbying efforts in D.C. and even pushed for stricter regulation around DeFi at the end of October, just weeks before his downfall. He also kicked $39 million toward political donations this year, Forbes reported.
While DeFi can arguably be hard to use for non-crypto-native folks, and adoption is slower, it has greater transparency than private centralized entities, both Anderson and Spencer said. DeFi transactions also used to be too expensive for the average user, costing about $100 per transaction, Spencer said. “That’s no longer the case, so that’s a pro, but it used to be a con.”
As Spencer describes it, “[DeFi] is autonomous smart contracts, decentralized organizations and trustless systems that are fully transparent.” This could be more appealing to both investors and consumers who want greater clarity.
And a lot of the industry is already leaning into DeFi, Spencer said. “As things get better, it’s easier to on-ramp, it’s easier to off-ramp and I think generally that’s how you get people to embrace it through building compelling products.”
And Framework isn’t the only group that sees DeFi as a strong area for future investments. The situation with centralized crypto exchange FTX has altered discussions for many investors and market players who see decentralization as an area for investment opportunities going forward, due to a number of elements, like transparency through on-chain data.
“This really sets out that decentralization really matters,” David Gan, general partner of OP Crypto, said on Wednesday. “I think a lot of centralized projects were being funded [and] we’ve seen Voyager, Celsius, FTX, etc. are centralized, non-transparent, opaque companies. So decentralization will start to matter more and more. Any protocol open source projects will see more funding.”
The demise of FTX has added lots of pain in the short term, but it will be positive in the long term, Anderson said. “There’s going to be a change of dynamics across the entire industry because of events like this — FTX had much broader reaches than Celsius. So it’s going to have a lot more pain.”
And it’s true. On Friday, FTX filed for Chapter 11 bankruptcy in the U.S and about 130 additional affiliated companies — including FTX US and Alameda Research — have also begun the bankruptcy process, FTX said in a statement.
Yes, the current unraveling of the ecosystem will “suck for a bit,” Spencer said. “But we have a plan for the industry that’s credible.”
“We know how to bring in users, we know what applications work and we know how blockchains and tokens can accrue value and be decentralized,” Spencer added. “The people who are not good actors in the space have been wiped out and we need to figure out a way to make customers whole someway, somehow.”