FTX suffered a bank run in a short period of time, it is a sudden thunderstorm which shocked the entire crypto world. The risks of CEX now should be reconsidered. Reflecting on the meaning of crypto, each participant should seriously consider this question: will crypto has any fundamental problems if supported by centralized exchanges?
FTX’s insolvency is by no means a failure of Crypto, it reflects the vulnerability of the centralized financial system. It shows that how bizarre operations CEX and how speculative institutions have in an environment that lacks enough supervision. FTX once regards itself as a bank. It used part of the exchange reserves to meet customers’ normal withdrawal needs, it mismatched funds with credit loans for any strongly related parties. It leads to an uncontrollable and unimaginable lack of risk control, especially for traditional finance institutions.
The the second largest exchange in the cryptocurrency world, FTX has The well-known brand reputation with image of compliance, security, reputation, yet it collapsed within a week. Its collapse reveals the fundamental problem of centralization — one has to believe it without verifying the true state of the centralized entity.
Crypto provides a decentralized, free, open, and censorship-resistant environment and infrastructure, yet many crypto centralized entities choose to do evil. The decentralized system empowers everyone to participate, interact and supervise freely. Everyone is important, people should work hard to prevent similar incidents again. The bankruptcy of a large CEX is a severe damage to the entire Crypto world.
<aside> 💡 FTX is not the first, nor will be the last. In the short course of Crypto’s development, We've seen the collapse of Mt.Gox, Flexcoin, and Bitstamp. We’ve also witnessed the bankrupt of Celsius and BlockFi, so #FTX won’t be the last to surprise us. Why do users still choose to believe CEX after so many insolvencies.
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The cost of trust and the optimistic bias drive the market continually look for the next worth believable CEX. In this paper, the cost of trust includes the cost people pay for trust and loss people have due to dishonesty.
Blockchain was designed to solve a trust problem: how to reach a consensus without the endorsement of a centralized entity. Achieving trust under the existing framework has certain costs. Running a decentralized public chain requires participants to continually provide resources needed for trusts, such as machine and network resources. Such expenses have to be paid by public chain users. To obtain sufficiently decentralized, anonymous, and secure services, people spent to maintaining a sufficiently decentralized, anonymous, and secure system.