SMART CONTRACTS, DEFI & WEB3 SECURITY - Chapter 9, Exercise 1 Solution
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Custody Risk and the FTX Collapse

PROBLEM
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Explain, using this chapter's own custodial-vs-non-custodial
distinction, exactly why depositing funds onto FTX exposed customers
to a real risk that holding the same funds in a personal, non-custodial
wallet never would have.

SOLUTION
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Depositing funds onto FTX meant handing over the private keys entirely.
Once a customer's crypto was deposited, FTX itself held the actual keys
controlling those assets, and the customer's own account balance became
nothing more than an internal database entry - a promise from FTX that
real, held assets backed that number, not a cryptographic guarantee the
customer could independently verify.

This is exactly the custodial model this chapter describes, and it is
what made the real, alleged misuse possible in the first place. Because
FTX itself held the keys, the company was structurally able to lend
approximately $10 billion in customer deposits to Alameda Research - a
decision no individual customer authorized, consented to, or could have
detected in advance, since nothing about a customer's own on-chain
activity would have revealed what FTX was doing internally with assets
it now controlled.

A non-custodial wallet removes this entire risk category by design. If
the same customer had instead held their crypto in a personal wallet,
the private key - and therefore full, exclusive control over the
assets - would have remained with the customer at all times. No company
could lend out, misplace, or become insolvent holding assets it never
actually possessed control over in the first place. The "not your keys,
not your coins" principle this chapter opens with describes precisely
this structural difference.

ANSWER: Depositing funds onto FTX handed private-key control to the
exchange itself, turning a customer's balance into an internal database
entry backed only by FTX's own promise rather than by the customer's
own cryptographic control - the exact structural condition that let FTX
allegedly lend roughly $10 billion in customer deposits to Alameda
Research without any individual customer's knowledge or consent. A
non-custodial wallet would have kept the private key, and therefore
full control of the assets, with the customer at all times, making that
same misuse structurally impossible regardless of what any company
chose to do internally.

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WHY THIS WORKS AS AN ANSWER

This correctly identifies the structural mechanism (who holds the
private key) that made the real FTX misuse possible, and explains why a
non-custodial alternative removes that specific risk category entirely
rather than merely reducing it.