After FTX: Defi can become mainstream if it overcomes its shortcomings
Investors are increasingly turning to noncustodial platforms after the collapse of FTX in 2022 and other centralized platforms. Analysis Many have raised concerns about unregulated centralized platforms after the collapse of the now-bankrupt cryptocurrency trading platform FTX. Investors are now questioning how safe it is for one’s money to be on these exchanges. They also have grave concerns about central decision-making that goes without checks. FTX had one billion dollars in a customer’s account and was found to have used the customer-deposited crypto assets as a way to offset its business losses. A recent report also suggests that the collapse of many crypto exchanges in the last decade has permanently removed 1.2 million Bitcoin (BTC), almost 6% of all Bitcoin, from circulation. Investors are now panicking over unethical practices of FTX, which was revealed in its bankruptcy filing. In the wake of the FTX fiasco, exchange outflows reached historic highs of 106,000 BTC each month. Investors are now turning to decentralized finance (DeFi), self-custody, and noncustodial options for trading funds. Uniswap (one of the largest DEXs in the ecosystem) saw a significant increase in trading volume on November 11, the day that FTX filed for bankruptcy. The implosion of FTX has acted as a catalyst for DEX trading to see a significant increase in volume. Uniswap saw a notable increase in volume after FTX’s implosion. Users are also aware of this. Uniswap flipped Coinbase in the wake of the FTX collapse to make it the second-largest platform to trade Ethereum after Binance. Decentralized platforms are managed by transparent and auditable smart contracts and not people. This means that there is no room for corruption or mismanagement. Cointelegraph reached out and spoke to PalmSwap to learn more about investor behavior and how it affected their platform. Co-founder and chief product officer of Palmswap Bernd Stockl said that the exchange has seen a significant increase in trading volumes. According to Bernd Stockl, chief product officer and co-founder of Palmswap, the exchange has seen a significant increase in trading volumes. He also stated that trust in custodial wallets has fallen with the fall of so many CEXs. This could lead to more users adopting DeFi. Elie Azzi, cofounder and DeFi infrastructure provider VALK believes that the rise in DEX volumes could signal a longer-term trend. Cointelegraph was informed by him that DEXs are innovating faster than their counterparts. Execution and settlement times have become almost instantaneous on some chains. The trend is that DEXs are improving the usability and user interface of CEXs while also improving the logic at the back end. This is in addition to the unique features that DEXs offer, such as self-custody and the ability trade from one’s wallet and retain control over private keys.” He said that while CEX platforms may have more stringent controls, transparency initiatives, “transparency would exist prima facie within full DeFi.” Instead, everyone would not need to trust CEXs with assets and all activity, including liquidity provision, trading, or any other, would be recorded on-chain. Data from Chainalysis, a crypto analytics group, shows that nearly 97% of all cryptocurrency stolen during the first three months in 2022 was taken from DeFi protocols. This is a significant increase from 72% in 2021, and only 30% in 2020. The Ronin network exploit in March, which resulted in a $620 million loss in funds. The hack of Wormhole bridge resulted in a loss of $320 million, while the Nomad bridge was hacked for $190 million. $718 million worth crypto assets were stolen from 11 different DeFi protocol protocols in October. The Nomad bridge was also compromised for $190 million. “A substantial portion of those exploits (approx. Bridge attacks accounted for a substantial portion of those exploits (approx. Bridges are not ‘DeFi’ as much as infrastructure. This number is dwarfed by CEX losses by an order-of-magnitude. Because DeFi can iterate faster, DeFi will improve and become safer than its centralized counterparts. This is similar to how Linux has benefited greatly from an open-source approach, and has achieved a strong reputation and phenomenal adoption,” she explained to Cointelegraph. DeFi is built on the principle of true decentralization. The decision-making process is often automated through smart contracts. DeFi attempts to eliminate human intervention. However, there are still vulnerabilities. These tools can be used to engage and attract users. Through the distribution of token supply, and safeguards like multi-signature wallets, decentralization of governance power is also important. Cointelegraph was told by Mitchell Amador, CEO of bug bounty protocol Immunefi that DeFi can benefit from advancements in the security department. “There’s a huge explosion in security tech being quietly developed in the background to address the security problem from every angle.” Many in the crypto space believe that the most important factor in the FTX saga is a lack of understanding by crypto investors. Barney Chambers, co-founder of Umbria Network, stated to Cointelegraph that the cryptocurrency space is still the wild, wild west in finance. To ensure your funds are safe, here are some tips: Never connect your wallet with a website that you don’t trust. Keep your keys in a trusted place like a hardware wallet. Never trust strangers on the internet asking for help. Do your own research. Investors can only ensure your funds are secure by demanding transparency and clear information from the parties they invest in. Darren Mayberry is the ecosystem head at dappOS and said that noncustodial services are the best way to ensure investors’ funds are safe. Non-custodial wallets are the best form of storage because they transfer liability onto the owner and negate the possibility of counterparty risk,” he said. Industry observers believe that due diligence and reducing human error can make DEX platforms, which are still emerging, a better option than CEX platforms.