The FTX collapse has shown clearly that DeFi promotes transparency and protects users

14.11.2022 | 6 min read

FTX was one of the biggest crypto-currency exchanges, but in just one week, it crashed spectacularly. People have different ideas about why it failed, such as that it was too close to the CEO's trading firm. Its failure sent shockwaves through the cryptocurrency market. But what does this mean for DeFi in the long run? And do we see signs of a pattern taking shape?

The collapse of the FTX exchange has caused a lot of confusion and concern amongst cryptocurrency enthusiasts. Centralized exchanges are known for being unreliable and vulnerable to attack, something that has been demonstrated time and time again. By using decentralization instead, we can ensure that our money is kept safe no matter what happens on the market.

An industry reputation in pieces

At the moment, speculation is still rife. Industry insiders are debating whether to call FTX’s implosion a ‘Lehman Brothers moment’ - referring to the 2008 collapse of the bank that triggered one of the largest recessions in recent history. Shan Jun Fok, co-founder of Moonvault Partners, a Hong Kong based crypto investment firm, said that:“A lot of people trusted FTX as the gold standard.”

Ran Neuner, Founder and CEO of OnChain Capital voiced his concerns about the ripple effect of a growing lack of trust in the sector: “We’ve had a cascade of failures [in the crypto industry]. The centralized players seem to have systematic failure because of greed, because of over-leverage, and stuff like that.”

It’s still too early to tell how far-reaching the consequences are likely to be. What is certain is that the entire crypto ecosystem has become more volatile, and that the event has destroyed regulator confidence.

In addition, the fact that decentralized exchange protocols are running regularly in spite of the fact that centralized exchanges are facing difficulty is evidence of the supremacy of decentralized finance over traditional financial institutions.

What is DeFi and how it works

There are many different ways to use DeFi protocols. You can use them to buy and sell cryptocurrencies, secure loans, and collect interest on your investments, among other things. DeFi can be used in a wide variety of contexts, and the list of possible applications is always growing. People are likely to begin utilizing DeFi in greater numbers as word of its advantages spreads.

DeFi's advantages are not exclusive to its users. The market's liquidity can be improved, and fraud risk mitigated, for instance. DeFi has the potential to increase the security and prestige of the crypto market over time.

While DeFi is not without its own set of dangers, these are less in comparison to those of more conventional financial structures. For example, traditional financial systems are prone to inflation, while DeFi is not. In addition, traditional financial systems are frequently controlled by central authorities, while DeFi is decentralized and governed by the community. When compared to the hazards associated with conventional financial systems, DeFi is a safer option.

The FTX exchange collapse highlights just how important it is for cryptocurrencies to remain decentralized in order to protect user funds from theft or other malicious activity. We need to build a more secure financial system if we want this kind of incident to become less common in the future.

CeFi’s weaknesses revealed

Over the course of the past year, investors have been learning the hard way that decentralized finance (DeFi) is the way forward for the modern age. Prior to FTX’s collapse, they’ve seen the downfall of Celsius, BlockFi and Voyager Digital. All of these are either centralized exchanges (CEXs) or centralized finance platforms (CeFi). In both cases, the operations are overseen by a central governing body. In fact, centralized exchanges are viewed by some almost as banks, as they enable coin deposits, include cards that you can spend at physical shops, offer loans and a whole host of other financial services.

CEXs are very friendly to newcomers and have a high degree of liquidity, but they’ve been criticized in the past as going against the true spirit of crypto. As it turns out, they also have a number of weaknesses. For a start, while they offer users exposure to crypto assets, they hold onto individual’s private keys, so investors will never have route ownership of their coins. This means that users of FTX, Celsius and others all lost access to their assets during the meltdown. But what was the story for DeFi investors?

FTX collapse: a swan song for CeFi?

By their very nature, DeFi projects are designed to preserve the perks that have first been introduced by crypto-enabled technologies. These include permissionlessness, fee elimination, widespread access, operational transparency and self-sovereignty over assets. The upshot? Not a single user lost access to their assets in the above-mentioned fallout.

In fact, Bloomberg has speculated that FTX’s collapse may in fact cause DeFi to grow. In the short term, the event will tighten the need for regulation, but it is also likely to boost longer-term interest in DeFi from venture capitalists.

Michael Anderson, co-founder of Framework Ventures, which partners with organizations to build token-based networks, put it this way: “It just seems obvious that DeFi is the only way that we can continue to do these types of financial services operations in the crypto ecosystem.”

How Cardano, Solana, and Polygon are leading the way in decentralization

The failure of the FTX exchange has contributed to the widespread belief that DeFi is truly working to increase transparency and safeguard user monies. While centralized exchanges are experiencing problems, decentralized exchange protocols are operating normally, demonstrating the advantages of decentralization.

With their forward-thinking approaches to the problem of decentralization, Cardano, Solana, and Polygon are currently in the driver's seat. These projects are at the vanguard of the push toward decentralization in the financial sector, which is the future of finance.

The users of these decentralized platforms can have peace of mind knowing that their cash are secure there.

The long-term future of blockchain is actually looking pretty healthy

There are currently a number of exciting initiatives taking place in the blockchain world, which means that despite the collapse of FTX, it is likely to have a healthy future ahead. There is extensive work currently being done on digital ledgers, there are new blockchain solutions for pricing carbon emissions, the ongoing rise of NFTs, the burgeoning world of Web 3.0 - and numerous other applications of the technology which mean that blockchain is far from dead. In fact, it’s likely to come back stronger.

In conclusion, the failure of the FTX exchange underscores the requirement for more severe regulation in the sector of cryptocurrencies. This is necessary to ensure the safety of investors and to encourage the expansion of the business.

It should not come as a surprise that the cryptocurrency business needs to win the confidence of investors before those investors will feel at ease investing their money in it.

Building trust requires transparency, which is why the industry needs to do a better job of providing it if it wants to attract more traditional investors.

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