The collapse of the FTX exchange, founded by Bankman- Fried in November 2022, was shocking as it left many crypto investors stranded. Poor risk management and suspected fraud are some of the reasons that led to its downfall.
Recently, the Economist inquired whether crypto is still worthwhile after the fall of FTX or if it is just rip-offs and guesswork. The technology used in the decentralized finance movement (DeFi) is awesome, as the procedures are transparent, and firm user protection measures exist.
CeFi and DeFi Financial Concepts
The user assets are stored by centralized crypto firms like FTX, known as CeFi. Unfortunately, traditional financial organizations like banks and CeFi are susceptible to threats. That is because their financial position is only sometimes that transparent, especially to regulators and investors.
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In recent months, FTX is not the only victim among cryptocurrency companies. Main user creditors like Celsius, BlockFi, and Voyager also underwent the same situation. In addition, withdrawals of $ 6 billion in assets happened in public blockchains through an FTX wallet.
There needs to be more information about where the withdrawn amount went and how much belonged to customers because FTX is a CeFi firm. DeFi’s reports supporting trading or lending are open to the public since accessing the data and analytics is free.
Every second, anyone with an internet connection tracks the assets and liabilities. European Investment Bank, Goldman Sachs, and JPMorgan are trying to test on-chain issuances as they can reduce liquidity, operational, and settlement risks.
DeFi is providing new levels of risk management and control to users. For example, when a person or institution safely keeps their crypto assets through a wallet, they can choose their unique password. In addition, crypto customers can exchange and loan through wallets instead of letting the assets sit on the balance sheet of a financial intermediate.
Although self-custody and DeFi are much more promising prototypes, they are still in their early stages. In Uniswap, for example, the protocol which enhances the exchange between different cryptos is four years old.
Comparable to the internet in its early stages, whereby it could be faster and, at times, easier to traverse for new consumers. More work is required to improve the speed, user experience, management, and social welfare services.
The efforts are in process, but they will take some time to be implemented. However, it is important to note that scammers and opportunists are everywhere; therefore, only some projects being called DeFi are legit.
DeFi protocols have been tested for a year and proved to be strong. Top DeFi money markets, Compound, and Aave companies have processed $47 billion in loans and $890 million in liquidations. Despite the extremely hot-blooded environment, there are relatively few bad debts.
No clearing agents are involved in processing the transactions of supplying or borrowing assets from Compound and Aave. The digital contacts are structured to limit liabilities so that they are not more than the assets that back them.
The world has become a village by being interconnected through the internet, and this has brought a problem of people being exploited by the elite. Therefore, the regulations meant to protect users must be equipped. The collapse of FTX affected people all over the world.
Fundamental improvements to CeFi and traditional institutions will help a lot. DeFi has to be improvised as technology advances, although it has proved to be the latest useful tool for user protection in this digital world.