Centralized exchanges are harmful entities to the crypto ecosystem
Centralized exchanges based on their current system of operation are the furthest to any safe haven in the crypto space, so while the otherwise narrative has been carried around by many, the FTX collapse points us in the right direction.
Custodianship in Crypto without decentralized consensus protocol is a flaw.
Before we talk about how this is pretty messed up from the current events, how about we think back to when Coinbase was hiting the headlines and there was many publications that Coinbase can in fact, dissolve users cryptocurrency in a situation of bankruptcy?
Remember that? Hang on, let me search the Web for it…
Thanks for waiting, found it:
Hidden away in Coinbase Global’s disappointing first-quarter earnings report—in which the U.S.’s largest cryptocurrency exchange reported a quarterly loss of $430 million and a 19% drop in monthly users—is an update on the risks of using Coinbase’s service that may come as a surprise to its millions of users.
Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.
From Fortune.com if you do not trust the source, see Bloomberg.com but you may encounter a paywall
This is one of its many disadvantages and while many may believe that it applies to "publicly traded '' cryptocurrency exchanges as Coinbase is, the situation with not publicly traded exchanges is much worse. However, this also opens our eyes to the truth that being regulated by the government or authority doesn't automatically define customer security, the system only cares as much to make a profit for themselves via the control they have over such companies.
Proof to this can also be derived from the recent LBRY events where the SEC won a case against the company, leading to a crash of the LBC token. If the SEC really cares about investors' financial security, how does causing a token to crash help the situation? It doesn't, the lack of control over the system's capital flow and revenue is a pain in the ass.
Back to cryptocurrency exchanges
What having a centralized exchange account means
Nobody reads terms and conditions/services, at least, not many do, so there is without doubt a great number of people unaware of how the system works.
When a user creates an account, let's say with Binance, a wallet address for every supported network is created, and only the exchange holds the keys.
The fact that the system does not use a "unified" address for most cryptocurrencies is where the biggest weekness lies. How? This automatically makes it difficult to trace how much an exchange holds on every given asset on the network.
My address differs from the next person and so on. Some may argue that it creates some level of security against the effects of potential hacks but then again, it creates an avenue for every exchange to function fully as a bank!
Remember that Binance may be buying a bank and judging from how these companies operate, the close relationship between the two sectors becomes stronger as the day goes by.
Centralized exchanges can easily move customers' funds for whatever practices they see fit, let's not forget the event where Binance was alleged of utilizing staked customers uniswap tokens for governance - although the exchange denied the allegations.
What people don't realise is that centralized exchanges are not blockchains, there are simply frontends that can choose whatever data they see fit to display, so this means that value can be moved away without anyone noticing.
exchange transactions should be differentiated by memos for increase transparency
When you look at @deepcrypto8 and @binance-hot you are able to tell just how much Hive balance Binance holds as an exchange, if the exchange were to move funds or stake tokens perhaps, it would be much easier to detect. While of course this does not solve centralization of funds, it aids the user base to have an oversight on the inner activities the exchanges carry out with user funds.
Using memo to tell one user apart from the other instead of multiple addresses that one exchange controls is far more ideal.
The need for increased token reserves transparency comes into the picture as FTX collapse points us to what damages can really be done.
Thank you and please leave a comment, your thoughts matter to me
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Very good insight into the risks of centralised exchanges, and the fact that regulators are businesses fending for control and profit.
For instance, the FCA in the UK is a private for profit limited company, and not a government body.
They even trade without liability insurance.
God bless TribalDex.
The future is decentralization as it should.