Centralized crypto exchanges, such as FTX, have become increasingly popular in recent years as a way for people to buy, sell, and trade cryptocurrencies. However, these centralized exchanges have little to do with the decentralized nature of cryptocurrencies themselves. In fact, these exchanges share many similarities with our traditional banking systems today, defeating the premise behind why Bitcoin was created in the first place.
Centralization refers to a system where power and decision-making authority are controlled by a single entity or a small group. Decentralization, on the other hand, refers to a distribution of power and control among multiple entities. Bitcoin is a decentralized cryptocurrency that was created in response to the 2008 financial crisis, which highlighted the lack of transparency and accountability in our traditional financial system. Satoshi Nakamoto, the creator(s) of Bitcoin, wanted to create a decentralized digital currency that would empower individuals to have more control over their own money and financial transactions. The goal was to create a peer-to-peer electronic cash system that eliminated the need for intermediaries like banks and governments.
One of the key similarities between centralized crypto exchanges and modern-day banking systems is the centralization of power. Just as banks are centralized institutions that control the flow of money, centralized crypto exchanges also control the flow of cryptocurrencies. They act as gatekeepers, determining which cryptocurrencies can be traded and how they can be traded. This goes against the vision of Bitcoin, which is to create a decentralized, transparent system where individuals have more control over their own money and transactions.
Another similarity is the reliance on trust. Just as people trust banks to keep their money safe and to facilitate financial transactions, people also trust centralized crypto exchanges to do the same with their cryptocurrencies. This trust is placed in the hands of a small group of individuals or companies responsible for maintaining the exchange’s infrastructure and ensuring its security. However, this also goes against the idea behind Bitcoin, which is to create a trustless and peer-to-peer system without the need for a third party.
It is very important to understand that centralized authorities can fail. When a bank fails, all the assets you have stored there are in jeopardy of being lost. This has happened numerous times throughout history and highlights the significant control centralized banks hold over our financial assets. Centralized crypto exchanges, such as FTX, also exercise control over users’ assets. The recent collapse of FTX highlights the risks of entrusting funds to a centralized exchange. The same can be said about our current banking system. Technical difficulties or hacks can lead to permanent loss of assets. Hence, before depositing a substantial amount of assets, it’s crucial to assess the level of decentralization and security offered by the exchange.
While centralized crypto exchanges have become an important part of the cryptocurrency ecosystem, they have little to do with the decentralized nature of cryptocurrencies themselves. They share many similarities with traditional banking systems, and it is important to understand the difference between the two. Ultimately, it is up to the individual to decide whether they want to trust a centralized institution or utilize the decentralized nature of cryptocurrencies which is why Bitcoin was created in the first place.