The collapse of the now-bankrupt cryptocurrency exchange FTX has raised many concerns over unregulated centralized platforms. Investors are now coming
The collapse of the now-bankrupt cryptocurrency exchange FTX has raised many concerns over unregulated centralized platforms.
Investors are now coming to question how safe it is to keep one’s funds on these exchanges and have voiced grave concerns about centralized decision-making without any checks.
FTX held one billion in a customer’s fund and was found to be using the customer-deposited crypto assets to mitigate its own business losses.
Furthermore, a recent report suggests that the downfall of numerous crypto exchanges over the last decade has permanently taken 1.2 million Bitcoin (BTC) — almost 6% of all Bitcoin — out of circulation.
The revelation of unethical practices by FTX in its bankruptcy filing has set a panic among investors who are already losing trust in these centralized trading firms. Exchange outflows hit historic highs of 106,000 BTC per month in the wake of the FTX fiasco and the loss of trust in centralized exchanges (CEXs) has pushed investors toward self-custody and decentralized finance (DeFi) platforms.
Users have pulled money from crypto exchanges and turned to noncustodial options to trade funds. Uniswap, one of the largest decentralized exchanges (DEX) in the ecosystem registered a significant spike in trading volume on Nov. 11, the day FTX filed for bankruptcy.
With FTX’s implosion acting as a catalyst, DEX trading has seen a notable increase in volume. Just last week, Uniswap registered over a billion dollars in 24-hour trading volume, much higher than many centralized exchanges in the same time frame.
Aishwary Gupta, DeFi chief of staff at Polygon, told Cointelegraph that the failure of centralized entities like FTX has definitely reminded users about the importance of DeFi:
“DeFi-centric platforms simply cannot fall victim to shady business practices because ‘code is law’ for them. Clearly, users realize it as well. In the wake of the FTX implosion, Uniswap flipped Coinbase to become the second-largest platform for trading Ethereum after Binance. As decentralized platforms are run by auditable and transparent smart contracts instead of people, there is simply no way for corruption or mismanagement to enter the equation.”
According to data from Token Terminal, the daily trading volume of perpetual exchanges reached $5 billion, which is the highest daily trading volume since the Terra meltdown in May 2022.
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Cointelegraph reached out to PalmSwap, a decentralized perpetual exchange, to understand investor behavior in the wake of the FTX crisis and how it has impacted their platform in particular. Bernd Stöckl, chief product officer and co-founder of Palmswap, told Cointelegraph that the exchange has seen a significant bump in trading volumes.
“The usage of DeFi will surely rise thanks to the FTX downfall. It is said that Crypto.com, Gate.io, Gemini and some other centralized exchanges are in hot waters,” he said, adding, “With so many CEXs falling, trust in custodial wallets is very low and the advantages of DeFi will surely be adopted by more users.”
Elie Azzi, co-founder and DeFi infrastructure provider VALK, believes the increase in DEX volumes could be the beginning of a longer-term trend, given a general reluctance from traders to trust CEXs with their assets. He told Cointelegraph:
“DEXs are innovating at a much faster rate than their counterparts, with execution and settlement times becoming almost instantaneous on certain chains. The trend is that DEXs are developing the usability and UI of CEXs, whilst improving on the logic in the back end. Combined with the unique features that DEXs bring, including self-custody, the ability to trade from one’s own wallet and retain control of private keys.”
He added that CEX platforms might see more stringent controls and transparency initiatives, but this “transparency would exist prima facie in full DeFi. Rather, no one would need to trust CEXs with assets, and any activity, be it trading, liquidity provision or else would be recorded in real-time on-chain.”
DeFi’s struggle with targeted hacks
While DeFi protocols have seen a significant bump in the aftermath of centralized exchange failures, the nascent ecosystem itself has been a prime target for hackers in 2022.
According to data from crypto analytics group Chainalysis, nearly 97% of all cryptocurrency stolen in the first three months of 2022 has been taken from DeFi protocols, up from 72% in 2021 and just 30% in 2020.
Some of the biggest DeFi exploits of 2022 include the Ronin network exploit in March that resulted in a loss of $620 million worth of funds. The Wormhole bridge hack lost $320 million and the Nomad bridge was compromised for $190 million. In October alone, $718 million worth of crypto assets were stolen from 11 different DeFi protocols.
A majority of the hacks in the DeFi ecosystem have occurred on cross-chain bridges, which Jordan Kruger, CEO and…
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