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The FTX Debacle and Centralized vs. Decentralized Crypto Debateby@bolu
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The FTX Debacle and Centralized vs. Decentralized Crypto Debate

by BeeDecember 15th, 2022
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2022 has given a new meaning to the centralized vs decentralized argument about crypto. The decentralized system looks like the way to go (protocols over people), but until it is perfect, both will have to coexist in perfect harmony.

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I shed tears the first time I used a decentralized exchange in 2021. While the experience didn’t change how I felt about cryptocurrencies in general, between the centralized vs. decentralized crypto platforms, my choice was simpler - the centralized exchanges.  

Reason? The centralized platforms were much simpler, and I didn’t have to waste money figuring things out. My first experience depositing crypto into a decentralized wallet didn’t go according to the plan, and I lost $70 in the process.

A lot has happened recently in crypto space, and choosing between centralized and decentralized platforms isn’t as simple anymore. 

On the one hand, you want a platform with zero KYC barriers, but on the other hand, you want a platform that holds your hand every step of the way, so you don’t get scammed or worse.  

Despite getting terribly burned on a decentralized platform, I understand that they work better. After all, that’s why cryptocurrencies were created in the first place.

According to Satoshi Nakamoto’s Bitcoin Whitepaper in 2009, Bitcoin was supposed to be a financial system that could coexist or perhaps replace the traditional finance system. But with centralized exchanges, it could take cryptocurrencies from a system in the control of just another fancy financial tech subject to government control.

Don’t get me wrong; government control isn’t always a bad thing (going to explain this later). However, Nakamoto has created a system that can survive without it. In the last decade, we’ve seen more decentralized crypto innovations proving this point. From non-fungible tokens (NFT) to decentralized finance (DeFi), it is clear decentralization is self-sustainable. 

The Pros of Centralized Platforms

The traditional financial system is regulated. From the Securities and Exchange Commission (SEC) to the Federal Reserve Board, these bodies have repeatedly protected us from bad actors in the financial space.

The financial crisis of 2007 to 2008 is a perfect example of why government control and supervision will always be a significant part of the current financial system. 

The crisis was devastating; it caused hardships for a lot of people globally, especially Americans. People lost their houses, and life savings, and behemoth financial cooperations were filing for bankruptcy. 

I was too young to understand the financial crisis but learning about it now; I realize it was a truly tragic period for the world. Major banks like Swiss bank UBS announced losses of up to $3.4 billion; British Bank, Nothern Rock, also had liquidity problems and needed rescuing from the Bank of England. 

By 2008 Lehman Brothers fell - it was one of the largest bankruptcy in US history. 

The government had no choice but to swoop in and save the day. It was a big save, and it cost the US government $1.4 trillion. 

The crisis proves that if the government gets a clear grip on the crypto market, it can protect the market. Also, if another FTX was to go down, regulators can save the day. 

However, there’s an important point people make: things can always go wrong as long as humans are in charge.

Is Nakamoto's system really perfect?

The first rebuttal to the argument that things go wrong when humans are in charge is that things had also gone wrong when we left software protocols in charge. 

The 2016 hack of a Decentralized Autonomous Organisation (DAO) was the first sign that protocols couldn’t replace humans. A DAO is an organization run by a software protocol or smart contracts that carry out actions based on the unanimous decision of those who vote for the decision to be taken. 

The first DAO was set up to be a decentralized investment fund. Ethereum, a more advanced network than Bitcoin, provided the framework for the DAO to be built.

About $150 million was raised for the fund, and a protocol was supposed to oversee the whole thing. But alas, it was hacked, and the hacker made away with $50 million. 

This case and others like it could be said to be an indictment of the decentralized system, but the truth is it only proves why we need to make protocols harder for humans to control. 

This argument is in the favor of a centralized system in the centralized vs. decentralized platform wars because the fact that crypto needs better protocols does not prove that it can survive without regulation. 

The only thing that proves that is that despite humans repeatedly throwing blows at the system through criminal practices, the system has survived without huge bailouts from anyone. 

Centralized and decentralized exchanges are different experiences 

For anyone whose first experience is getting scammed into buying a shitcoin on Pancakeswap or Uniswap, decentralization would seem like a terrible thing, and they won’t be wrong. 

If you were wondering what my first experience was like on a decentralized exchange was like, well, the truth is I got scammed twice! 

The reason why decentralized exchanges are the wild wild west is that anyone can go and come as they please, taking advantage of people’s greed to scam them. 

I could say that someday in the future, a system will be created to vet who creates what token, or better still, a system will be created to help people make better decisions, but it would sound unrealistic. 

But there’s always something to learn from history. Ethereum brought us smart contracts, NFTs, and so much more, and for this, I’m inclined to believe the system is growing and somehow bettering itself. 

The current financial system didn’t get to where it is overnight, and for the many years it has been around, it still isn’t perfect. 

These systems work; these are brilliant and functional. Getting rid of decentralization isn't just ripping away the sanctity of Nakamoto’s creation. It is taking away the very essence of technology. 

The cohabitation of the systems 

If the FTX debacle has taught me anything, it is that centralized crypto exchanges are not going anywhere anytime soon. It made it obvious that a lot of people use centralized platforms. 

The day after Binance CEO, Changpeng Zhao (CZ), revealed that his company would be selling off FTX’s native coin, FTT, Bitcoin went from $21,000 to $15,000. 

If centralization continues to be a big part of crypto, then government control will have to be equally massive. 

Until we have protocols impenetrable by humans and a way to vet who comes and goes, decentralization and centralization will have to co-exist in perfect harmony.