Reasons why the collapse of CeFi entities is a proof of crypto forging ahead


The crypto space endured a series of unfortunate events in 2022,  beginning with the Terra debacle and ending with FTX’s chaotic death  spiral. This caused consumer confidence in crypto-related platforms to suffer greatly. Despite the setbacks, however, the industry has succeeded in holding its ground and is now showing symptoms of growth.

The industry’s willingness to recover from such incidents illustrates its resilience and longevity, thus proving that it is not going extinct anytime soon. But it also highlights the vulnerability of centralized structures such as exchanges or trading and lending platforms. What is vital here is to pay attention to their limitations and find ways to mitigate them to ensure the lasting success of the industry.

What is CeFi and DeFi?

CeFi refers to centralized finance. It is a conventional financial system where financial institutions, such as banks and stock exchanges act as intermediaries between customers to conduct financial transactions. When this is the case, cash assets (money, securities, etc.) are centrally-controlled, which means that these assets are stored and managed by a bank or exchange rather than directly by the user.

Over the last few years, an alternative to the centralized financial system has emerged: decentralized finance (DeFi), which uses blockchain technology to create decentralized platforms and protocols allowing users to manage their cash assets without any middlemen.

What has actually happened?

Even though cryptocurrencies were designed as a tool for decentralization and autonomy, centralized exchanges (CEX) and other organizations of such kind have become an important ingredient of the crypto industry’s infrastructure. Still, recent failures of CEXs have revealed that these institutions do not always fulfill their obligations towards users and often violate the principles of decentralization, which are fundamental to crypto. Additionally, reckless risk management and the desire for growth at all costs have led entire exchanges to go bankrupt, losing crypto-assets and users’ funds.

Among the solutions to improve users’ security and protect their assets is the shift to DEXs and platforms, where users can control their digital assets themselves and avoid the risk of losing their wealth. At the same time, decentralized exchanges allow for greater transparency and minimize counterparty risk, as all transactions take place on the blockchain. But due to the need to protect the anonymity of users, DEXs are in a regulatory grey area, which may delay their widespread adoption.

Interestingly, the crypto industry lacks stricter regulation to help protect users and prevent the collapse of such platforms. A cryptocurrency should not bear responsibility for careless and illegal actions of the company’s executives, who violate the principles of decentralization and jeopardize the funds of users. With the latest incidents of centralized platforms, companies whose business models are failing and unreliable executives are being eliminated.

Decentralization helps users retain full control over their digital assets, preventing them from being misappropriated or exploited for purposes not intended by the user.

DEXs such as Uniswap, SushiSwap and PancakeSwap offer users the opportunity to trade digital assets directly, providing a high level of security and reliability.

These types of platforms likewise provide greater liquidity and an improved UX, as market participants can join and contribute to the network. In this way, an ecosystem is formed so that each participant has something to contribute to the development and improvement of the platform.

What does it all mean?

Setbacks of centralized entities in the crypto industry stressed the importance of respecting the fundamental principles of decentralization and self-sufficiency. What these failures have shown is that too much reliance on centralized platforms can lead to disastrous consequences. In contrast, decentralized businesses can significantly reduce counterparty risk and increase transparency by conducting immutable transactions across the blockchain.

Nevertheless, such organizations pose quite a few problems for regulators since they create a regulatory gray zone by protecting the anonymity of users. That said, some solutions do exist to help overcome these obstacles and enable wider diffusion of decentralized platforms.

In order to address the problems associated with centralized and decentralized platforms, regulation needs to be tightened to prevent platforms dealing with customer funds from engaging in high-risk, high-leverage activities.

Regardless of the challenges, the crypto era is far from over. While the industry requires more decentralization and regulation to screen out rogue players and failing business models, the remaining projects could thrive if they focus on core infrastructure, maintain a high level of decentralization, and improve robust technology standards.

Conclusion

Decentralization is an inevitable trend in the crypto industry, as it provides greater security and robustness for users, as well as reduces the perils associated with centralized organizations. DEXs have already proven their viability and are capable to rival all the existing CEXs. It is expected that the decentralization might become both a go-go and a must-have of the crypto industry.

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