Collapsing Crypto Exchanges Are Making Web3 Better
Call it a bear market or a crypto winter, or whatever you will, but the market downturn, and the high-profile collapses of certain currencies and chains is easily the best thing to happen to Web3 and DeFi. Much like anything, the blockchain adheres to the natural laws of nature; it’s survival of the fittest. For that reason, the collapse of centralized crypto platforms like Celsius, Voyager, 3AC, FTX, and BlockFi being one of the latest, makes the case for Web3 even stronger.
The Walls are Crumbling
At recent count, there are over 600 crypto exchanges in the world. Centralized crypto exchanges (CEX) are managed by one organization, and they make it easy to get started with cryptocurrency trading by allowing users to convert their fiat directly into crypto. Then, if they want to sell, they can.
Until now, the only complaints against centralized exchanges was that they go against the ethos of decentralization and crypto, and they’re subject to regulatory rules such as the Know Your Customer (KYC) rules. These require each user to divulge their identity, much as you would when you apply for a bank account, to combat money laundering and fraud. This meant that in the event of a hack, all of your assets and information is in one place.
Except, the mess that centralized exchanges find themselves in now, didn’t come from outside forces. It came from within. For example:
Celsius Network: Froze customer accounts and filed for Chapter 11 bankruptcy this past July, citing "extreme market conditions." This meant that they went from $11.7 billion in assets to a mere $167 million in cash on hand at the time of filing.
Voyager: Was a crypto powerhouse until it made immense unsecured loans to Three Arrows Capital (3AC). When they defaulted, Voyager froze customer accounts and filed for bankruptcy.
3AC: As a result of the failures of TERRA and LUNA, upon which they heavily invested in, the hedge fund couldn’t pay or return assets, and defaulted on their loans.
FTX: customer funds were used as a “personal piggy bank” to make private investments including real estate and political campaign donations. The lack of liquidity, mismanagement of funds, and a large volume of withdrawals led to bankruptcy.
BlockFi: Paused customer withdrawals in the wake of FTX’s failure; filed for bankruptcy in November.
So the overall outcome is that financial institutions that investors and consumers trusted to hold and grow their crypto, failed them. All of these crypto exchanges were very good at attracting deposits. When it came to lending that money out … not so much.
This can only mean good things for non-custodial wallets, Web3, and DeFi.
How Will Non-Custodial Wallets Boost Web3?
A Web3 non-custodial wallet gives users full control over their funds. They are in charge and responsible for their own crypto. No one else has the private keys, and it’s not sitting on a centralized server, to be used how the exchange sees fit - no one else can access or spend the funds without the user’s permission. When you want to withdraw your crypto, you can do so. Self-custody means that you don’t need to trust someone else and their technology to keep your assets safe.
What That Means for DeFi
DeFi protocols allow users to interact with digital assets without relying on any third party intermediaries. Which means, people who want to invest in cryptocurrencies—such as lending, staking, and trading—can do so, without having to worry about the security of their funds or the fees associated with traditional financial services.
While the case for DeFi doesn’t need much help, the collapse of these exchanges only proves what Web3 citizens have known all along; that decentralization is important, that transactions should be trustless, and that crypto is a means to an end. It’s useful, but the goal of most of the innovators and builders in the DeFi space isn’t to make as much money as possible, then cash out. It’s to build a better system of organizations that are trustless, democratic and far less predatory than traditional finance.
The use of a non-custodial wallet, enables a user to have freedom; the freedom that if something goes wrong with a service provider, a dApp, DAO, or anything else on chain, they can move their funds elsewhere without any disruption in service or loss of funds. As well, DeFi offers users access to a range of new investment opportunities that were previously unavailable or difficult to access due to high fees or regulatory restrictions.
So while these bankruptcy filings from the exchanges are weeding out the weak, people are learning that only self custody can guarantee complete financial freedom.
With users in complete control over their funds and exchanges and custodians effectively crashing and burning, the more they'll gravitate towards DeFi, and the more DeFi applications would be built to meet the increasing demand.
That's something we're actively working on.