January 31, 2023

3GI Ventures November 2022 Report

Dear 3GI Token Holders,

You have probably heard about the collapse of the second largest crypto exchange in the world, FTX, and its affiliated hedge fund, Alameda Research, in the first half of November. FTX is primarily a centralized exchange where customers deposit actual money or crypto tokens, and trade them for other crypto tokens. This came as a surprise to many as FTX and Alameda were both regarded as top entities and are both founded and run by Sam Bankman-Fried (a.k.a SBF), one of the leading figures in the crypto space.

Long story short, Alameda Research was in dire need of cash following a crash in the market, which led to Sam Bankman-Fried taking advantage of his position by giving Alameda Research some cash relief, which essentially is customer deposits into FTX. This is a big conflict of interest given the intermingling between the two companies. When word got out of the actual situation at both companies, FTX customers rushed to withdraw their crypto assets off FTX and into self-custodial wallets on the blockchain (more on that later). This turned into a bank run - and since FTX didn’t hold its customers' assets 1-to-1 with the underlying assets, they had to freeze withdrawals. At that point, it was clear that a lot of FTX customers would lose their assets stored on FTX which resulted in FTX filing for Chapter 11 bankruptcy. This incident brings back parallelisms with the traditional financial industry, where on many occasions throughout history, banks and other players have failed to honor their obligations and survive bank runs. What happened with FTX is the shortcoming of centralized financial systems, a problem that the crypto industry is working on solving with Decentralized Finance.

FTX is thought to have had over 5 million customers with somewhere between $10-$15 billion in crypto assets held on the exchange. Many of their customers are funds or financial institutions that were also greatly affected by the collapse of FTX. The event is likely to have ripple effects that have yet to play out as most crypto entities' financial dealings are related to one another (funds lend & borrow from each other and use assets as collateral, which in cases of market downturn will lead to liquidations of those assets).

There is an entire crypto ecosystem that is strongly supported and indirectly sponsored by FTX and its group of affiliated companies. That ecosystem suffered greatly from the events that took place as FTX and Alameda had to liquidate their holdings in tokens related to such ecosystems.

In fact, all crypto projects that recently faced turbulence or the risk of collapse, such as Voyager, BlockFi, and Celsius, are centralized by nature. What this means is that they do not provide their consumers with true ownership over the coins they have traded on those platforms, which could have a risk of losing those coins (as seen on FTX). This all goes against the true nature and basic principles of crypto. One of the most important propositions of crypto is the ability to self-custody your own coins instead of needing a company to do that on your behalf, which is effectively what FTX does.. For example, when you deposit money in the bank, you are trusting the bank to keep the money safe for you. If you do not trust the bank, then you keep your cash hidden under your pillow. Crypto is basically like cash but it's digital, which means that you are able to hide your money electronically without the need to trust any third party such as a bank. Another critical component of crypto is that it is governed by code which means that it cannot be manipulated or corrupted as the code will always work as intended. For example, in the case of Alameda, they were forced to repay their decentralized finance loans before repaying their traditional finance loans because in the case of decentralized finance, the terms of the loans are governed by code, which means that they are subject to automatic liquidations if not repaid while the same cannot be done with traditional finance loans. Not only that but decentralized finance protocols offer full transparency and are open for anyone in the public to inspect while traditional systems are not. While the FTX debacle has hinted that the crypto space is still prone to problems, it is in fact the opposite. Had those customers used a decentralized exchange, they would have had no risk of loss.

We are glad to inform you that 3GI Ventures had no direct exposure to FTX or any of its affiliated projects and therefore we were not impacted by the collapse of FTX and Alameda per se as we embrace the fundamental values of crypto and blockchain technology. The event's impact on our portfolio was limited to the market dip/sell-off that followed and has since recovered considerably.

As usual, the PDF version of this monthly update can be found here.

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