- There are risks attached to storing funds on centralized exchanges.
- Investors and traders should practice self-custody or use decentralized exchanges like DCRDEX for trading purposes.
FTX and Mt. Gox are some of the most popular cryptocurrency exchanges that collapsed since Bitcoin was launched in 2009. However, there are hundreds of other centralized crypto exchanges that collapsed or ceased to operate over the last decade.
Investors and traders have lost billions of dollars by dealing with centralized cryptocurrency exchanges. However, all these could be avoided if investors and traders trusted decentralized exchanges more than their centralized counterparts.
The risks of using centralized exchanges are too high
Jonathan Zeppettini, Strategy Lead at Decred, recently talked about the risks attached to using centralized cryptocurrency exchanges.
Centralized crypto exchanges like Binance, KuCoin, and Coinbase continue to dominate the market and account for a large portion of the trading volume in the cryptocurrency space.
However, using them to store funds is risky. While talking about the risks of using centralized exchanges, Zeppettini said;
“The main risk is that while speculating to get a return on capital, you never see the return of your capital. Whether the exchange itself absconds with your funds, gets hacked, or becomes creative and loses your funds while trying to generate yield for themselves (or you), there are a myriad of ways they can fail and become insolvent.”
Decred’s strategy lead added that self-custody is important in the cryptocurrency space as Satoshi Nakamoto built Bitcoin on the back of sovereignty. By allowing centralized exchanges to run the crypto ecosystem, Satoshi’s initial aim has been defeated.
While discussing the importance of self-custody, Zeppettini said;
“It's absolutely essential, Bitcoin was literally created to be trustless, so that users could have sovereignty over their money. To then turn around and leave these types of assets with centralized entities is patently absurd. It shows a lack of understanding or extreme complacency if users aren't willing to do something as basic as buy a hardware wallet and transfer their assets into their own custody. Time and time again, we've seen exchanges fail.”
Decentralized exchanges eliminate risks for traders and investors
Decentralized exchanges have become an important part of the cryptocurrency industry. DEXs such as Uniswap, Pancakeswap, DCRDEX, and Sushiswap, continue to capture more value in the market and could continue to attract more users over the coming years.
Zeppettini pointed out that funds are never safe on centralized exchanges, and DEXs have made it easier for people to trade with little to no risk.
Recently, centralized exchanges like Binance, KuCoin, Bybit and OKX, have released their Proof of Reserve to convince users that their funds are safe on those platforms.
However, when asked about what it would take to convince him that funds are safe on centralized exchanges, Zeppettini said;
“Absolutely nothing could convince me that allowing somebody else to custody my crypto assets is a good idea. I've heard an amusing analogy that crypto exchanges should be treated like public restrooms, where you go in, do your business, and leave as quickly as possible. I think that's sage advice. We're rapidly approaching the point where technologies such as atomic swaps are enabling us to not even need to make use of centralized exchanges at all. DEXs (decentralized exchanges) such as Uniswap or DCRDEX allow users to trade without any counterparty risk, investors are seeing the value of the disintermediation they allow for, so I expect them to pick up market share as we continue to see tragedies unfold with incumbent players.”
The cryptocurrency space continues to evolve, and the next few years could see DEXs take the lion's share of the market.