Centralized crypto exchanges have recently become a hot talking point among mainstream crypto advocates for various reasons. As we look back on November 2022, we might conclude that the “Centralization Era” in crypto has come to an end. FTX is the latest entry in a long history that can be traced back to Mt. Gox, Voyager Digital, and Celsius Network showing how corporate failures pose the greatest obstacle to crypto adoption. In light of the obvious threat posed by centralized entities to the crypto industry, it is time that crypto enthusiasts must join forces and push for change!
A “centralized crypto exchange” is practically an oxymoron. The crypto industry must return to its roots and focus on decentralization if crypto is to take back power from corrupt, fallible institutions, say experts.
What Are Centralized Cryptocurrency Exchanges (CEX)?
A centralized cryptocurrency exchange is one of the most important vehicles for trading digital currencies in the majority of cases. Centralized cryptocurrency exchanges allow buyers and sellers to trade cryptocurrencies online. Cryptocurrency holdings are typically bought and sold using these kinds of exchanges.
Exchanges function primarily as marketplaces. They serve a very important purpose when many people may be trying to buy and sell the same type of asset simultaneously at the same time. New York Stock Exchange and London Metal Exchange are a couple of famous exchanges serving the Forex market. As far as cryptocurrency is concerned, Binance and Coinbase are two very well-known exchanges in the sector.
When we speak of “centralized cryptocurrency exchange,” the term “centralization” means that you are using a middleman or third party to facilitate the transaction of cryptocurrencies. As a matter of fact, both buyers and sellers rely on this middleman to take care of their assets. In the same way that we trust the bank with our money when we open a bank account.
Is the ‘centralization era’ in crypto coming to an end?
Following the 2008 financial crisis, crypto was created based on the concept of true individual ownership and self-sovereignty. The system was built to be different, where users held their own wallet keys and could trade without any middleman.
Since Bitcoin was created, the animating vision has been to reclaim control over money for all of us. In history, we’ve been taught that “power corrupts,” and when you give someone control over your money, they’re bound to abuse it. A similar situation is occurring in the crypto world at the moment, where self-custodians and centralized custodians are at odds.
While the Centralized crypto exchanges were an appealingly convenient way for consumers to invest in cryptocurrency, unfortunately, a series of massive meltdowns affected billions of dollars of assets and trust among people during the centralization era.
Crypto lenders Celsius Network and Voyager Digital declared bankruptcy earlier this year after not being able to process withdrawal requests from their customers. As a result of the collapse of FTX, another lender, BlockFi, announced that it was “unable to operate business as usual” and had temporarily suspended client withdrawals. AAX announced this week that withdrawals had been halted due to technical difficulties with a third-party partner. The cryptocurrency lender Genesis announced that new loans and redemptions have been suspended temporarily.
It is unfortunate that both Voyager and FTX users learned the hard way that the cryptocurrency they held on these platforms wasn’t really “theirs” at all. Often, centralized exchanges co-mingle their customers’ funds with omnibus wallets, and treat them like “unsecured creditors.” Tragically, the depositors of Voyager have seen the company’s management, employees, lawyers, and bankers consume the company’s capital resources while their crypto remains locked up in the bankruptcy process.
While many crypto well-wishers support decentralization as the only viable route forward, the crypto community needs to return to its roots and reclaim its power back from the hands of corrupt institutions.
The financial giant JPMorgan discussed with insight how prominent cryptocurrency exchange FTX collapsed. According to JPMorgan, the recent crypto collapse is due to centralization. The banking giant also believes FTX's failure will eventually lead to stronger regulations for cryptocurrencies. According to JPMorgan, "All of the recent collapses in the crypto ecosystem have been from centralized players and not from decentralized protocols."
DeFi Protocols Win Users as Centralized Crypto Exchanges Fail
As Ethereum tokens flow off large, centralized exchanges like Binance following the collapse of Sam Bankman-Fried’s FTX exchange, crypto traders are increasingly shifting towards decentralized finance (DeFi) protocols. Data analytics platform Nansen reports a double-digit percentage increase in users and transactions for DeFi protocols following the collapse of FTX.
To illustrate, dYdX, a decentralized crypto exchange on the Cosmos blockchain ecosystem, has seen its users increase by 99% and transactions increase by 136%. While trust in centralized exchanges has plunged following the collapse of FTX, Uniswap, the largest decentralized crypto exchange, has experienced 19% growth in users and 21% growth in transactions over the last 30 days.
With users opting to store their cryptocurrencies elsewhere, centralized exchanges are experiencing a mass exodus of wealth. It’s likely that the significant outflows are indicative of a lack of trust and confidence in centralized exchanges among users.
However, according to experts, a problem exists!
FTX Failure Could Drag Down Decentralized Crypto Too
Many advocates of digital currencies view FTX’s collapse as a demonstration of the difference between “bad” centralized crypto and its “good” decentralized counterpart. Unfortunately, fans may not realize that the two are inextricably linked.
While investors are leaving centralized crypto venues and dumping digital currencies because of the FTX debacle, a big problem remains, which is the fact that all of DeFi’s growth since its foundation in 2017 has been in tandem, and not as an alternative to, centralized crypto.
Furthermore, the growth of decentralized lending has been related to stablecoins, which largely peg to the U.S. dollar to solve crypto’s massive volatility problem. Ultimately, the U.S. government determines the value of any dollar peg, and there are several mechanisms to keep the peg alive, including arbitrage exchanges and collateral-based mechanisms, which can fail. Like money-market funds in 2008, TerraUSD stablecoin experienced this in May.
Though Tether, the most popular stablecoin, has not yet broken down, the price has declined by $3.5 billion in the past month and continues to trade below $1. Ultimately, it is unlikely that either regulators or investors will be able to distinguish much between centralized and decentralized crypto financing in the near future.
FTX teaches us not just that opacity is bad, but also that crypto as a whole is a deeply interconnected ecosystem where assets are created without reference to real-world wealth and used as collateral for what amounts to a single, huge credit risk—crypto itself.