It’s a story almost as old as bitcoin itself: centralized exchanges fail, taking with them faith and trust in bitcoin, as well as the assets of the people who thought they held bitcoin in the first place. It started with the failed Mt.Gox and many bitcoiners claimed to be “Mt.Gox creditors” years ago. Now, FTX has come to the fore, leading some experts to argue that an Enron-like failure could plunge all bitcoin and cryptocurrencies into a near-permanent bear market.
We have seen the failures of exchanges and exchange-style intermediaries. FTX is a prominent example of a centralized exchange that holds more “paper” for its customers than bitcoin. After a long and drawn-out bankruptcy process, it’s unlikely that asset owners will find much in the way of recovery. We’ve seen centralized exchanges fail due to mysterious circumstances being hacked or important stakeholders such as founders passing away.
What is a centralized exchange?
Centralized exchanges are a way to trade bitcoin for fiat and sometimes bitcoin for other cryptocurrencies. If they are centralized, they are like a traditional corporation, with headquarters somewhere in the world, a dedicated team and, most importantly, oversight responsibility for their users.
Instead of buying bitcoin directly from a peer who sends it to your wallet (though perhaps in an escrow system), your holdings are tracked digitally with the exchange’s own ledger: in effect, it serves as a banking layer for bitcoin with the exchange management. custody/security of assets and in return gives you a certain amount of bitcoin/crypto-currency that you can withdraw to your wallet if you choose, provided the bank layer is still solvent. You trade digital assets with a forward-thinking view of the world – a world that relies on interconnected peers and nodes, not a remnant of intermediary-based trust.
This is important because one main thing a centralized exchange does is act as a custodian of your funds. When you have a balance on a centralized exchange like Coinbase or Binance, you don’t actually “own” the private key of the wallet that holds the bitcoin or cryptocurrency in question, but rather you have a claim to a large amount of bitcoin. held by the stock exchange.
Centralized exchanges are a necessary evil, a way for most people to buy bitcoins without having to physically meet someone or incur the high costs and fees of bitcoin ATMs. Many don’t have direct access to mined bitcoin, or they have the scale as an individual investor to make deals for themselves because they can get it on exchanges.
Some may not want to bother with the security and privacy implications of self-protection because they find it too complex compared to product-driven and marketing-refined onboarding funnels in centralized exchanges.
This is especially so since exchanges that are virtual businesses can advertise extensively and offer cheap onboarding fees and other incentives (such as trading options) to attract users on a large scale – something that both Binance and FTX have followed to grow. as fast as they did.
What does all this mean for the future of bitcoin, and are there alternatives to centralized exchanges?
While centralized exchanges and the transactions within them have certainly helped the bitcoin ecosystem grow, bitcoin has never needed centralized exchanges.
There are now a variety of options, from Lightning (which allows for more seamless and cost-effective peer-to-peer transfers of bitcoin) to the emerging Fediment standard, which helps give bitcoin storage to more hands without needing it. centralized exchanges.
There are more peer-to-peer exchanges, such as Paxful, where users trade bitcoin and other cryptocurrencies directly with each other, and the intermediary does not keep them under their control, but rather charges some sort of listing fee. Others, like Bisq, have organized themselves in a DAO-like fashion and sought to not only scale peer-to-peer trading, but to organize it in a way that removes them from being middlemen at all. By being built on a network of nodes running free, open source software (similar to bitcoin), Bisq offers the ability to trade bitcoins in a peer-to-peer environment similar to bitcoin itself.
You still can’t pin bitcoin on its creator, Satoshi: still, you can’t go anywhere without seeing Sam Bankman-Fried in the flesh paired with FTX. Perhaps there is no better visual representation of the difference than this.
The large exchange ecosystem offered everything from income to many different cryptocurrencies to attract people to the ecosystem. However, these proposals have proven to have limited staying power. Those offering a ton of trading options and leverage/income for Bitcoin are looking dubious after the collapse of FTX and Celsi.
Centralized exchanges are a way for many people to get comfortable with bitcoin, but they have supported speculation (at least when viewed from a multi-year perspective) as network activity increases in terms of mining, nodes, and Lightning usage. These are the determinants of bitcoin’s future success – adoption and use by stakeholders around the world.
Bitcoin’s adherence to the same fiat-driven logic of idle capital storage and speculation helped bitcoin make a name for itself. But many now confuse commercial activity with the meaningful building that needs to happen in the ecosystem. It’s a “bear market,” but the appetite for innovation around the world has never been higher for bitcoin.
With the adoption of more decentralized exchanges, Chaumian mints like those offered by Fediment, and more peer-to-peer ways to work with bitcoin, the need for centralized exchanges is diminishing with each new innovation. Centralized exchanges were a big reason for bitcoin’s initial success: eventually, price action fueled interest and turned hobbyist interests into a mainstream financial option. However, what drives bitcoin through its early stages of growth may not be what is needed to sustain the network in the future.
Centralized exchanges may have a role in bitcoin’s future – but it’s unlikely to be as central as it is now, and certainly bitcoin can survive and even thrive without centralized exchanges like Sam Bankman-Fried’s FTX.