DeFiChain

<p>If you’ve been tuning into the news over the last weeks, we’re certain you’ve seen the headlines about the imposition of FTX. FTX is, or was, a major centralized cryptocurrency exchange, which had over a million active users. If we’re going off daily trade volume, FTX was the third-biggest crypto exchange in the world.</p><p>But, in the space of a week, FTX has gone up in flames, with billions of dollars worth of assets being liquidated from the platform and the ex-CEO, <a href="https://www.businessinsider.com/ftx-sbf-crypto-saga-explained-what-happened-what-it-means-2022-11" rel="noopener noreferrer nofollow">Sam Bankman-Fried losing almost all of his $16 billion net worth</a>.</p><p>While FTX and SBF have released statements about why their collapse happened, many believe that they’re not sharing the whole story. A recent <a href="https://markets.businessinsider.com/news/currencies/ftx-crash-client-funds-alameda-binance-sbf-sec-cftc-probe-2022-11?utm_medium&#61;ingest&amp;utm_source&#61;markets" rel="noopener noreferrer nofollow">report published by Reuters</a> states that SBF transferred around $4 billion of user deposits to Alameda Research after it hit a rough financial period. SBF is the founder and owner of Alameda, essentially having used user funds to bail out his own company - all without those users knowing.</p><p>For those unfamiliar with how crypto exchanges work, the idea that a CEO can simply transfer user funds wherever they like might be a little unsettling. For the past few years, this has been a common criticism of centralized exchanges, with users citing their discomfort at the lack of control they have over their own funds.</p><p>In this article, we’ll dive into what this recent implosion of FTX has taught us about cryptocurrency exchanges. We’ll touch on centralized exchanges, explore how they work, then compare them to their decentralized counterparts.</p><p>Let’s jump right in.</p><h2 id="header-0">How Do Centralized Exchanges Function?</h2><p>Centralized exchanges allow users to buy and sell cryptocurrencies online and are currently the leading way that people interact with cryptocurrency. The main upside to them is their simplicity, mirroring how stock exchange apps sell shares. Anyone that’s already familiar with investing can create an account on a centralized exchange and have a very intuitive experience.</p><p>Any transactions that are made on a centralized exchange are logged within the exchange. All funds that come into and out of the system do so through this third-party, not actually having any documentation on the blockchain. Due to this, users aren’t actually in control of their funds, as the funds are stored on the centralized exchange’s own database, rather than a public blockchain.</p><p>Centralized exchanges function like a black box - you never quite know what&#39;s going on inside. As a customer, you’re completely in the dark about where your cryptocurrency is, or whether it’s even really there.</p><p>As a centralized organization, if you decide to trade on these platforms, you have to also play by their rules. It means that the company has the final say when it comes to managing and moving your cryptocurrency. Even the prices and exchange fees on the platform are all set and regulated by the centralized exchange itself.</p><h2 id="header-1">What’s The Problem With This?</h2><p>The main problem with centralized exchanges, which more and more individuals are now realizing, is that the exchange is in complete control. Beyond just setting up the trades, they also log everything themselves. This system means that you never actually own your cryptocurrency, as your digital wallet isn’t on the blockchain, but within the exchange.</p><p>The recent FTX news has shed further light onto a potential danger of centralized exchanges. FTX was misusing user assets, with the CEO sending his own company a sum of cryptocurrency that belonged to the platform’s users. Once people started to realize this fact, with Binance pulling out of acquiring the exchange due to nefarious conclusions of internal research they did, the platform went into a tailspin.</p><p>As people tried to withdraw their capital, they realized that FTX just didn’t have that amount, rendering the exchange unable to give people their own funds. In response to this, many of the other leading centralized exchanges, like <a href="https://fortune.com/crypto/2022/11/14/binance-promised-transparency-proof-of-reserves-crypto-ftx/" rel="noopener noreferrer nofollow">Binance, have promised to release Proof of Reserve documents</a>.</p><p>These documents will bring a level of transparency to centralized exchanges, providing more accountability to where user funds are being stored. Yet, for many traders, this simply isn’t enough.</p><h2 id="header-2">How Does DeFi Work?</h2><p>The other side of the coin in the world of cryptocurrency exchanges is decentralized exchanges. A DeFi exchange differs from a centralized (CeFi) one as they record all transactions directly onto the blockchain. As blockchain acts as an ongoing ledger that is unable to be altered and is public, this provides complete visibility over the entire process.</p><p>People are beginning to favor decentralized exchanges because they are the ones that are in charge of their own funds. Instead of being stored within a centralized platform, users’ crypto assets can be tracked on an immutable ledger. And users have private keys that permit them to access their cryptocurrencies any time they want.</p><p>Considering recent events, this system is much more secure for users, in general. If FTX was a decentralized exchange, all users would know where their funds are, with the platform being unable to move or manipulate user accounts. Without any ownership of user funds, a decentralized exchange cannot tamper with wallets, as we saw with FTX sending crypto to Alameda Research.</p><h2 id="header-3">Is DeFi All Good?</h2><p>You might be wondering, if centralized exchanges are such a risk, why do people use them at all? Besides the aforementioned convenience, DeFi is also unregulated, meaning there is a larger security risk than within centralized financial platforms. In 2021 alone, there was over <a href="https://www.cnbc.com/2021/11/19/over-10-billion-lost-to-defi-scams-and-thefts-in-2021.html" rel="noopener noreferrer nofollow">$12 billion</a> lost in security attacks targeting DeFi exchanges.</p><p>As people have more control over their finances, they’re also put at more risk, as phishing emails and hackers will attempt to find the details that unlock their private wallets. To combat this, many DeFi platforms have been heavily investing in client-side security, as well as education for their users.</p><p><a href="https://defichain.com/" rel="noopener noreferrer nofollow">DeFiChain</a>, for instance, is one of the leading native decentralized financial platforms. Besides being fully decentralized with internationally distributed nodes, DeFiChain has committed itself to thorough security. With non-Turing complete smart contracts and the immutability that Bitcoin’s blockchain ecosystem provides, it has created a nearly-impervious environment.</p><p>Of course, no system is perfect. But, as more DeFi platforms fight to make their ecosystems as secure and easy-to-use as possible, they are increasingly becoming the preferred option for investors.</p><h2 id="header-4">Final Thoughts</h2><p>Ten years ago, you’d be hard-pressed to find a reliable DeFi exchange. With that in mind, centralized financial exchanges have been the go-to solution for quite some time. However, with the recent news and the mounting uncertainty around cryptocurrency, more and more users are moving to DeFi solutions.</p><p>Having complete ownership of user funds is the priority for the majority of investors, meaning that DeFi is the only comprehensive solution available. As DeFi exchanges continue to improve their security offerings and increase their complexity, they will rapidly convert into the dominating choice in this financial arena.</p><p>If FTX has shown us anything, it’s better to get our funds into a cold DeFi wallet sooner rather than later. No matter how established a platform is, we’ll never truly know what goes on behind closed doors within centralized exchanges.</p>

CeFi vs. DeFi - What The Recent Chaos Taught Us

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DeFiChain

Alte articole publicate pe 29 nov. 2022

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