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Learning from the FTX collapse: Are centralized exchanges really safe?

TL;DR

  • The recent collapse FTX has raised concerns about the safety of centralized exchanges.
  • CEXs have recently shown a tendency of investing user funds internally.
  • DEXs might offer more transparecy and control for users going forward.

The recent collapse of popular crypto exchange FTX is again raising the question of ‘who actually controls our crypto assets?”. This whole debacle has significantly damaged the crypto industry, as almost every major cryptocurrency is experiencing historical downtrends. What’s worse is that thousands of users have lost full control of their crypto assets on the exchange. 

However, this isn’t the first time that a centralized exchange has collapsed. Earlier this year, both Celsius and Voyager, two of the biggest centralized crypto platforms also went bankrupt, after not being able to show enough funds to accommodate all user withdrawals. 

The recent collapse of FTX shows that this is an on-going trend from centralized exchanges. A lot of these popular exchanges tend to act like banks, investing users capital in other businesses, often high-risk ventures. This is a disastrous pratice, as asset withdrawals in the crypto industry is much frequent and wider than centralized banks. In addition, it’s highly unethical, as user funds are being locked up and internally invested without any acknowledgement or concern. 

FTX

So, going forward – can we really trust more of these centralized exchanges? And are decentralized exchanges a better alternative? 

Lessons from the FTX insolvency 

FTX’s collapse only solidified what we already feared about centralized exchanges. It’s the fact that such platforms lack control and accountability. When you’re putting you crypto assets in such platforms, you’re not really in control. The private keys of your wallet are not in your custody, rather they are with the CEOs and operators of these platforms. 

There is no accountability that is holding these organisations back from using your capital to invest in other affairs, without any consent or acknowledgement. If those investments blow up, the user funds are gone. The next step, as we have seen over and over again, is to suspend all user withdrawal activity and file for bankruptcy

There’s also the fact that a lot of these platforms don’t have any significant insurance for users. So, if your funds are lost due to insolvency or a cyber-attack, it’s more or less lost forever. 

All of these incidents surrounding crypto exchange in 2022 has taught us that there is no transparency in how centralized exchanges operate. Without transparency and control, the code principle of cryptocurrency and blockchain is ultimately lose. So, before screaming for regulations, the crypto community should consider if we are actually upholding the true values and principles of crypto in the first place. 

Are decentralized exchanges the better alternative? 

Decentralized exchanges or DEXs are barely used by the crypto community compared to their centralized counterparts. However, it might be a good time for users to re-think their crypto storage practice. DEXs offer a lot of solutions that are plaguing the industry today. 

Most importantly, they offer more control over user funds. DEXs use a peer-to-peer system, where only the users are in control of their accounts, funds, and their private keys. If your accounts were to get hacked, it will only be your own liability. However, users can rest assured that their funds aren’t being used by any other entity. 

Such exchanges offer users full-custory of their wallets. In current circumstance, such platforms are a much safer alternative, because there is no middleman. User don’t need to deposit their funds into an intermediary account, so you’re mostly safe from hacking and scams. 

There’s also the fact that DEXs don’t have transaction fees. With any middlemen, there is no one to take a big chunk out of your assets during every withdrawal. 

However, that doesn’t mean that decentralized exchanges are without its cons. While some centralized platforms do offer a certain level of insurance, DEXs dont. There’s also the fact that DEXs often have a complex interface, and are not always the most user friendly platform for beginner or intermediate traders. 

In conclusion, we are not saying that decentralized exchanges are the best solution going forward. However, we do want to urge users to re-think where their crypto assets are being help, and what type of insurance or risk do those platforms provide. In 2022, one thing has become certain, which is that we can’t blindly trust centralized exchanges. Storing your assets in cold storage wallets would be a must safer bet than having them stored in such platforms. 

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Mohammad Shahid

An IT and Cybersecurity graduate with specialized knowledge of cryptocurrency and blockchain, Mohammad joins the Repo elite team. He has worked on several blockchain development projects and is an enthusiastic crypto trader.

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