An overwhelming majority of cryptocurrency and blockchain projects (crypto assets) on the market today are centralized in one way or another.
Even more startling, 85 per cent of development teams have the authority to alter their crypto assets protocol at their own discretion. (popularly referred to as washing)
Report finds only 16% of cryptocurrencies are decentralized, decentralization is mighty important in cryptocurrency. One of the primary benefits of cryptocurrencies over conventional currencies is decentralization. By removing intermediaries, cryptocurrencies enable two parties to transact without having to trust a third-party intermediary
But where does the overlap come in between decentralization and centralization, will it be the “KYCs”?
What then becomes of KYC which interestingly aims to protect centralized platforms and makes only one side of the spectrum, the other side being the actors or managing team of these centralized exchanges – two questions remains unanswered or seem rather ambiguous,
who “police” CEX actors? CEX means centralized exchanges
Aren’t we meant to be decentralized?
The recent chaos around the centralized exchange FTX has sparked questions about the pros and cons of keeping your coins on centralized versus decentralized exchanges. We break it down.
If you are considering buying or selling crypto, your first port of call will probably be an exchange. Most commonly, the first point of entry to trading cryptocurrency is a centralized exchange (CEX), a digital marketplace where crypto trading takes place. You have probably heard of a few: FTX, Binance, Kraken, Coinbase and so on. In Nov. 2022, a CoinDesk scoop led to a stunning turn of events that led to a huge liquidity scare for FTX and a possible acquisition by Binance, the largest centralized exchange by market cap in the world.
Satoshi Nakamoto released the Bitcoin whitepaper in 2008, and mined the first block on January 3, 2009, with the following message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Satoshi Nakamoto wanted to create a decentralized, low-trust, and censorship-resistant network. Though, these principles can be broadened to include distributed and public.
This network would not be centralized, i.e., the network would have no central point of failure.
This network would require low trust, to avoid the issues Satoshi saw with central banks where so much trust was required to simply make the fiat currency system work.
The promise of decentralization Satoshi Nakamoto gave to the world in January 3, 2009, Bitcoin, has grown and many have seen the potential for decentralized systems in many industries and fields, such as finance, Internet-of-Things (IoT), and even climate change.
Following a run on FTX last week, the disgraced crypto exchange filed for Chapter 11 bankruptcy on Nov. 11.
As most cryptocurrencies suffered heavy losses following the collapse of FTX last week, Trust Wallet Token bucks the trend, growing 58% over the last 24 hours.
Since Nov 7, Trust Wallet Token increased in value by 113% to lead the top 100 tokens. This run of form has resulted in a new all-time high of $2.48 on Nov. 1
Multiple allegations of irresponsible investing practices, and worse, have been uncovered by internet detectives throughout this period.
A $650 million hack on Nov. 12, suspected of being an inside job, dealt a further blow to the platform’s users.
Although the exact size of FTX’s black hole is not known at this time, many still consider the scandal the biggest in crypto history due to the apparent facade of legitimacy presented.
Unfortunately, a consequence of promoting openness and public accessibility is malicious actors entering the system to upend the very values and principles underlying it.
Bitcoin’s decentralization is threatened by many actors, but two in particular who are deeply involved in the inner workings of the Bitcoin ecosystem are:
The mission was to keep Bitcoin decentralized and show the world that there is another way, but this has not been the case, and has led to many forks such as Decred, BitcoinCash, Bitcoin Private, etc., which want to fulfil Satoshi’s “original goal”
Decentralized exchanges (DEXs) have been emerging over the last five years to challenge incumbent CEXs. In brief, DEXs aim to offer lower transaction fees, let users directly hold their own assets and avoid some regulatory burdens. On the other hand, they face the cost of compensating their liquidity providers for a special kind of risk called “impermanent loss.”
CEXs offer advantages too. Most centralized exchanges use a business model similar to traditional institutions like the New York Stock Exchange, which is a structure traditional investors understand and may feel more comfortable with. Their interfaces and apps tend to be more beginner and user-friendly and generally offer more liquidity and stronger regulatory assurances, which can be especially important for institutional clients. But it also means the central company running the exchange has a lot of power and responsibility for the financial stability and health of the exchange.
Aren’t we meant to be decentralized?
55 per cent of crypto assets on the market today aren’t just securities – they are heavily centralized too.
In fact, just 16 per cent can be realistically classified as being anywhere close to Satoshi’s vision of a trustless, decentralized network.
As neat as this system is, it does introduce a risk for the liquidity providers behind the pool. The risk is called impermanent loss. Liquidity providers are entitled to withdraw the portion of the value of the pool they contributed, not the exact number of tokens they put in. It could not promise all providers their exact tokens, because the ratio of different tokens held in the pool changes as trades occur. But as the ratio adjusts to reflect current wider market prices, the pool is going to progressively contain more of whatever token is losing value and vice versa.
Anyone who really believes that cryptocurrency, specifically Bitcoin is decentralized and democratic needs to seriously look at the recent market events. Whilst whales continue to manipulate the market from time to time and FUD (fear, uncertainty, doubt) and FOMO (fear of missing out) impact upward or downward trends, decentralization (or the apparent lack of) is a cause for concern.
The decentralized, democratic vision of the ‘genuine’ Satoshi Nakamoto (not the power-hungry, egotistical, megalomaniac, Faketoshi — Dr Craig Wright), appears to be just a pipe dream in reality.
The fact is, Bitcoin still leads the market and is the most sought-after currency. In recent times, its dominance has almost always been above 50% of the entire market, making it the catalyst for almost all crypto-market moves.
That’s all well and good, and to be honest I am a bit of a Bitcoin maximalist myself, with my ultimate aim being to increase my overall BTC holding in the long term, thus increasing BTC and equivalent fiat value.
I would wager that for the vast majority of us, it’s about investing and making gains rather than the libertarian view of decentralizing currency and removing control from banks. When all is said and done, do we really care if it is decentralized or not? At the end of the day, if you are in the crypto-market to make money, does it make any difference to you?
There are cryptocurrency realists who insist that decentralization and democracy are core drivers for cryptocurrency use-case and adoption. A Utopian view perhaps appears to have some major drawbacks and flaws as we have seen over the last few weeks. By default, decentralization as we know it now in many cases means that there are no checks and balances as to who has control. Is this a good thing?