Centralized exchanges releasing ‘proof of reserves’ is not enough to win back users, while improving user experience will be key, writes Holger Arians of Banxa.
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The FTX scandal continues sending shockwaves throughout the cryptocurrency industry. Few could predict that the highly-regarded centralized exchange (CEX) would implode, leaving vulnerable retail investors to bear the brunt of the catastrophe. Thousands of FTX users were unable to pull their funds off of the exchange when insolvency rumors began to swell, and now may never be refunded. The collapse has underscored the vital importance for crypto users to be able to transact quickly and efficiently across platforms.
So what’s next for the crypto industry? CEXs adopting “proof of reserves” is simply not enough to win back users. In order to restore user trust, there are a few important steps that platforms can, and must, take. In light of the uncertainty of centralized finance (CeFi), users need ways to transact and move funds with ease and security more than ever before. Individuals must be empowered to take control of their crypto keys. While CEXs are convenient and boast a superior user experience, they should not be used to house long-term investments. Amid the FTX fallout, we are witnessing a massive migration from CeFi to decentralized finance (DeFi), but in order to both onboard and retain users, there must be assurances that they will be able to securely off-ramp and withdraw assets quickly.
Uptick in DeFi user activity post-FTX
Crypto users are transacting at heavy volumes in the wake of the FTX disaster, seeking out safe harbors for their assets.
For example, Uniswap — one of DeFi’s most popular decentralized exchanges (DEXs) — recently surpassed Coinbase for daily trading volume on Ethereum pairs. Moreover, research firm Delphi Digital found that centralized exchanges experienced a net US$5.5 billion outflow on Ethereum from exchanges over 7 days in mid-November, coupled with its DEX basket rising 33.8% compared to BTC.
The case for fast self-custody
Centralized crypto exchanges will still serve an important purpose in the ecosystem for some time to come, but perhaps not forever. In fact, a Binance executive recently stated its CEX may not exist in 10 years because of the macro movement toward DeFi. To that end, we simply cannot afford to overlook what DEXs bring to the table in terms of security and autonomy. Both CEXs and DEXs have their own laundry lists of pros and cons, and users must be discerning when choosing where and how to store their crypto to meet their specific needs.
In the wake of FTX’s collapse, the classic catchphrase “not your keys, not your crypto” rings truer than ever. The danger of keeping your assets on a centralized exchange is that your ability to access your crypto is fully dependent on the exchange’s ability to transfer it to you. In a crisis of confidence, investors may panic, attempting to pull all their funds quickly and essentially cause a run on the exchange.
Non-custodial wallets are a great option for those wanting top-notch security. There are two types of non-custodial wallets: hardware and software. Both store the private crypto keys, strings of numbers and letters that resemble a highly-sensitive password. Non-custodial options ensure that the user has complete ownership over their assets. Custodial wallets are easier for crypto novices to adopt, however, the private keys are held by a third party which can come with risk.
The key to DeFi: improving user experience
Most crypto users, especially novices, have typically gravitated towards CEXs for convenience and user experience reasons. In order to both onboard and retain more users, the glaring DeFi user experience issues must be addressed.
One of the largest barriers to mass adoption of DeFi is the lack of a seamless and secure on-and-off-ramping process. If key DeFi entities are able to perfect the entry and exit points to and from their platforms, they will facilitate a much more approachable and accessible experience for all users.
Above all else, there must be trust in user autonomy over assets, no matter the platform. Ultimately, the industry can restore trust amid the FTX catastrophe by making crypto more accessible — and transactions faster. While the macro-economic environment remains a devastating one for retail investors and the crypto community at large, the Web3 revolution is still very much poised to overtake legacy finance.