The Problems of CEXs underscore The Value of DEXs and DeFi
The FTX scandal is still reverberating across the cryptocurrency sector. Few expected the highly praised centralized exchange (CEX) to crumble, leaving vulnerable investors to suffer the brunt of the disaster. The failure has highlighted the critical necessity of DeFi and DEXs.
Our community keeps learning more lessons; BlockFi, Celsius Network, Voyager Digital, and now FTX.
OK. All of these are centralized exchanges (CEXs) and centralized financed platforms (CeFi). Their business strategies are decades old; the only new thing about them is that they provide customers with exposure to crypto assets - but it’s not root ownership, because they own the keys to those assets.
The fall of FTX shook the volatile crypto market, which lost billions of dollars in value, it also reminded everyone of the need to safeguard their own money and served as a warning about the dangers when we are too trusting in “centralized” systems. Investors and customers have lost billions, and not all of it will be recovered, FTX CEO Ray told the House hearing on Dec. 13.
The media now has chances to describe this as the end of cryptocurrency, many say that the fall of FTX is extremely detrimental to cryptocurrencies, demonstrating that this industry is untrustworthy and might collapse at any time.
So, what would the FTX empire's demise mean for the crypto ecosystem? Does this really bring death to crypto or will it push forward on on-chain activities, DeFi, self-custody, to more excitement?
FTX, which Bankman-Fried founded when he was 28 years old, grew to become one of the largest cryptocurrency exchanges in just three years, with a $32 billion valuation. Sam rose to prominence through his political lobbying and donations, as well as his efforts to help the Cryptocurrency industry more broadly.
But, FTX crashed, the collapse resulted in the loss of billions of dollars in customer funds. Other entities providing centralized crypto services (CeFi) have also been affected by FTX connections, with several declaring bankruptcies. Although FTX is a participant in the crypto industry, it is not a crypto failure. Believe me!
It is actually a failure of people, of greed, of concealed transactions and organized thefts of customer funds. It's the narrative of a kind individual who always earns people's confidence with a desirable image, but - himself - conducted one of the biggest scams in crypto and finance.
Consider that SBF was the second-largest CEX, and that centralized platforms regard DeFi as a rival. What he wanted was not consumer protection, it was his dominant position and to reinforce his competitive moat.
People used Sam's products, people adored the image that he had created - the cover of Forbes, a billionaire philanthropist, a genius with full-of-power friends around. Many individuals had always desired to be a part of his empire. Sam was trusted not just by novice investors, but also by experienced investors, including significant funds and investors with substantial holdings.
Woefully, they were betrayed, not by cryptocurrency or Blockchain technology, but by him “Samuel Bankman-Fried”.
Today's crypto industry has been evolving in the direction that many "centralized projects" provide services such as buying, selling, trading, exchanging and managing custody of crypto. Centralized Exchanges (CEXs) have now made a huge impact on the crypto industry by introducing and educating new users, giving them easy access and exposure to cryptocurrencies.
However, no matter how many safeguards are in place, a centralized project will always have human errors. In centralized projects, where humans will have access to control and manage data, there is always the risk that people may make mistakes in some way.
Moreover, centralized entities always lack transparency. Every time a user or organization deposits their money into a centralized exchange or a CeFi, all we can see after that are numbers on the screen. In fact, it is not clear what is happening with our money, as the story of FTX demonstrates. Right now, although Sam Bankman-Fried says he did it intentionally or unintentionally, it is undeniable that he put his hands into clients' money, performing various acrobatics that have not been publicized to this day.
So, what comes next for the crypto industry? Nowadays, "proof of reserves" is simply not enough for CEXs to win back users. So what future platforms can and must do to rebuild user trust? The answer is “DeFi and DEXs”.
DeFi platforms are intended to maintain the features offered by Bitcoin and amplified by Ethereum: transparency, self-sovereign custody of assets, permissionlessness, and censorship resistance.
In DeFi, all actions can be seen on-chain, they are defined and executed by codes. Code is the law, it's unbiased, and it works the way it's written.
We can encode the exchange rules on the Blockchain and enable transactions to be executed, ensuring that all parties have custody of their tokens. When interacting with DeFi protocols, users can always manage their own funds. Furthermore, cryptography creates privacy for individuals while allowing them to interact with a transparent public ledger.
The past year has been a wonderful test for DeFi protocols, indicating that they can survive and bounce back strongly from crashes in macro and crypto environments. Leading DeFi money market protocols, such as Aave and Compound, continue to service the market. Besides, a slew of new DeFi applications is being developed on other Blockchains.
Centralized exchanges have been at the forefront of attracting new customers and providing them with the best trading tools, and they now account for the majority of trading activity. However, the rise of DEXs ended CEX supremacy and ushered in a new age of permissionless, public, transparent, and efficient Blockchain trading.
DeFi - The key for the future?
Most crypto users, particularly newcomers, have flocked to CEXs for ease and user experience reasons. They have also become familiar with the "White-glove Services" that these projects provide. To onboard and retain more users, DeFi user experience issues clearly must be addressed.
One of the most significant challenges to DeFi general adoption is the lack of a smooth and safe on-and-off ramping process. If important DeFi companies can perfect the entry and exit points to and from their platforms, all users would have a far more friendly and accessible experience.
Cryptocurrency users are constantly reminded of their right to self-custody, and they are turning to DEXs and DeFi platforms. The use of centralized exchanges is very convenient because the features provide an extremely convenient, user-friendly interface. However, for now, Blockchain technology is advanced enough to provide features that make Decentralized exchanges operate like CEXs.
Investors tend to weigh their capital and seek transparency. Now that the rates in DeFi are cheaper than CeFi, why should they use CeFi? Why would you put yourself at risk with a centralized party, and no matter how strong its backing, they always have risks, why should we choose?
DeFi is at the forefront of transparency. For sure, DeFi has not yet matured and flourished, but it has exhibited far greater transparency and security than CeFi owing to the intrinsic features of Blockchain and Cryptography.
The decentralized exchange has evolved with technology. Layer 2 and the application of Zero-Knowledge technologies are now receiving a lot of attention. All of this is significantly improving the throughput of DEXs while reducing gas costs and elevating trade execution to new heights. Order Book and Limit Order orders are now available on decentralized exchanges, which formerly relied primarily on the AMM (Automated Market Maker) mechanism, for example, Uniswap.
DEXs are inherently transparent; all actions, whether a DAO buyback, a public sale, or a token conversion, may be reported to the community. Professional market participants are becoming more interested in DEX since it is a vast open market with minimal monitoring risk and new market prospects.
Finally, the industry can reestablish confidence in the aftermath of the FTX disaster by making crypto more accessible – and transactions quicker. While the macroeconomic situation continues to be disastrous for individual investors and the crypto community as a whole, the Web3 revolution is still on track to overcome conventional finance.