Blockdaemon Blog

A Message From Blockdaemon's Founder & CEO, Konstantin Richter

Nov 18, 2022

Last week's events are a great reminder that complex systems will fail over time if their governance mechanisms aren’t transparent. As we continue to witness the fallout from FTX, it’s important to reiterate that Blockdaemon has absolutely zero exposure to FTX or Alameda Research.

FTX's downfall seems to be as much the fault of an individual defrauding users as an absence of oversight.

You will hear a lot about how DeFi or software fixes this and how centralized entities have no place in crypto. Both are only partly true. Both DeFi and centralized entities will have to live in symbiosis for quite some time if the goal is to provide the largest group of individuals with access to reliable financial rails. Let me explain. Software solves for this only in as much as the software needs to be truly open-source and auditable in a reliable manner at all times. The issue with FTX wasn’t only the breaking of rules, it was the absence of rules.

Wrongly encoded governance does not solve for this. We need a reliable DeFi auditing infrastructure and many more contributions from varied stakeholders for the promise of DeFi to work. We also need clear rules for DeFi and standards to evaluate code from the perspective of the smaller capitalized user. There is much more work to be done here.Centralized entities like Coinbase provide a user experience you can trust and pave the way for non crypto-native fiat holders to safely engage with crypto-currencies. Without those the total addressable market will be a lot smaller and the innovation cycle will slow.  

Centralized entities bridge that gap and also provide more protection than poorly governed bridges. But only if they are governed appropriately — security and financial audits, board oversight, clear adherence to regulation, and more (all things we do at Blockdaemon).

None of this occurred at FTX. We tried to work with them, but they insisted on running their blockchain infrastructure in-house for privacy reasons. Now we know why.

What does this mean for Blockdaemon, an infrastructure provider owned by dozens of reputable investors and a passionate team? We have bylaws that give us a clear corporate rule set — no new entities can get started, no wires of over $250K can leave board-approved bank accounts without board approval.

We proactively anticipate regulatory developments and ensure we have what it takes to seek licenses if required –  OFAC screening processes, KYC/KYB and a licensed compliance officer. Our TradFi investors require that we adhere to regulatory guidelines  (even if there are no guidelines specific to our industry today, we work to anticipate regulations) — audited financials, ISO security certification, KYC/KYBing all customers, etc. – all this is “hard-coded” into our governance.

Changes to governance require either 50% of preferred shareholder votes or up to 80% of all shares for some instances, which requires a near dozen or more diverse stakeholders to agree. Even as a founder/CEO and board member, there is no way for me to bypass this process.I urge everyone working with centralized entities in crypto to ask about their governance, who serves on their boards, how many share classes are there, are they getting audited by a reputable firm for financials and tech. If it is a custodian or exchange, are they working with internal and externally controlled nodes? It often surprises me how few customers and partners ask for this information (unless they are doing a proper RFI).

The same goes for DeFi, just different — has the code been audited? By whom? Who controls the underlying infrastructure? Where are the respective nodes hosted? Who controls the token settling transactions?We have a long way to go before trustless systems are fully automatable. In the interim, don’t trust – verify. We are here for all of it.


Konstantin Richter

Founder & CEO of Blockdaemon


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