ADVERTISEMENT
Advertise with BNC

Where To Now As Bitcoin Says Goodbye To Exchanges

After the failure of custodians like Celsius, FTX, and others, cryptocurrency holders have been pushed towards self-custody. This trend, which began in 2020 primarily thanks to the emergence of onchain decentralized finance solutions, has accelerated massively in 2022.

Although crypto exchanges have been collapsing in spectacular fashion almost since the birth of Bitcoin, the chaotic year that was 2023 has finally led many crypto traders and holders to a couple of logical conclusions. One, that there is just too much counterparty risk associated with exchanges to risk leaving their assets in an exchange wallet, and two, they will need to find somewhere else to put their coins – quickly.

Why Are Crypto Exchanges So Risky?

Most of the internet is already using middlemen tools, like Airbnb for finding private accommodation solutions, and centralized exchanges fit into this mold. In simple terms, centralized cryptocurrency exchanges are online platforms used to buy and sell cryptocurrencies. They are the middlemen that create solutions for users to trade between fiat and crypto assets (where they act as an onramp and offramp for fiat currencies), or between crypto assets, in an opportunistic efficient manner.

Most of the internet is used to using middlemen tools and centralized exchanges fit into this mould. They offer a marketplace to connect buyers and sellers of crypto assets and take fees in return for their facilitation service. This is much easier than trying to find an individual buyer or seller and negotiating a price with them.

There is another trade-off when using an exchange—custody.

In order for an exchange to smoothly and quickly facilitate millions of transactions between thousands of users, they need control over their user’s assets. Total control. Users hand over their wallet keys and let exchanges manage their assets using opaque infrastructure because they trust them. It is assumed that exchanges hold assets & liabilities 1-for-1 but it is now apparent that not all do this.

The collapse of FTX showed that exchanges comingle assets between connected companies and do risky things with customer deposits. There is a view now that the opaque financial reporting practices of exchanges are nowhere close to being enough to return trust to the marketplace.

Binance, the world’s biggest crypto exchange, recently tried to introduce some transparency to its operations – releasing a rather circumspect and tightly ringfenced set of numbers. It wasn’t enough for crypto social media though, which promptly blew up and Binance found that rather than being satisfied, its users actually came back with more questions. Questions that were harder to answer.

The problem is that the destruction of trust delivered by the collapse of FTX has been so absolute that trust returning to the sector will likely take a total reworking of how exchanges maintain their liquidity – and how they communicate those workings to their users.

FTX’s customers trusted their assets to the exchange which then used them to give out personal loans to executives, help fund random startups, bail out failing sister companies, and make massive donations to both major American political parties. FTX reportedly had well over a million users, all of whom are now unable to withdraw the assets they were holding to FTX. It will be an uphill slog to get those experienced crypto users to ever trust an exchange again.

Bitcoin Has Left The Building

Where failures like Terra and Celsius had driven fast movers to pull their funds of centralized crypto platforms, FTX was the last straw for the masses and crypto holders across the sector began pulling assets out. Onchain data shows that the movement off exchanges surged following the collapse of FTX, which coincided with rumors that other exchanges like Gemini, Crypto.com, and Binance were also facing liquidation and financing issues.

Picture3Source: Glassnode

Today, 88% of all BTC is now held off exchanges. Like BTC, we see a similar pattern forming for ETH with, large amounts of the asset being moved out of exchanges and into private custody.

Picture2 Source: Cryptoquant

This presents both an interesting opportunity and an inflection point for crypto’s primary protocols like Bitcoin and Ethereum. Can they develop solutions that keep holders onchain and the sector liquid – without using Web 2.0 solutions like exchanges?

Solutions Keeping Holders Onchain

Solutions like Taro are trying to increase the options for users onchain. Taro utilizes the Taproot upgrade, which is designed to enable the issuance of any kind of asset on the Bitcoin blockchain while still using the immutable verification of Bitcoin’s proof-of-work consensus model. Taro allows for the issuance of assets like currencies, stocks, and other cryptos on top of the Bitcoin chain. Functionality like this could mean there will be less reason to ever turn to opaque solutions like exchanges to be a crypto price speculator.

There will also be foundational reforms in crypto in the short term. Regulators, institutions, and retail investors are all turning away from third-party crypto custodians. The arrest of Sam Bankman-Fried has set a precedent and exchanges will not be able to run as fast and as loose as before. If crypto users still want quick, frictionless crypto trading facilities then Decentralized Finance trading solutions like Uniswap are perhaps a better option than heavily regulated centralized exchanges. That said, the DeFi sector still has huge security issues of its own to contend with.

Crypto Hardware Wallets Booming

There has also been an explosion in interest in hardware wallets. Companies like Ledger have said that November was a bumper sales month and new products are being released rapidly. Hardware wallets are one of the most secure ways to store crypto assets that don’t touch the internet unless needed. Given the trauma that crypto holders have felt, it is not surprising that they are turning to a far more secure, but more laborious crypto operations and management.

Ledger has employed Original Ipod designer Tony Fadell to design its new STAX hardware wallet. The STAX has an e-ink touchscreen, anyone who has used an Amazon Kindle will be familiar with this form of touchscreen.

Foundation Hardware Wallet

The Foundation ‘Passport’ wallet.

Another unique wallet, includes the “Passport”, the Flagship hardware wallet built by Foundation. It has extra tight security because it has no external USB or any wireless connections. It uses a camera and QR codes to communicate and a built-in colour display.

There are also other major players in the space like Trezor and Jack Dorsey’s Square building innovative hardware wallets. The future is exciting for this specific niche of crypto.

Conclusion

The crypto industry’s slogan for 2022 is ‘Trust no one’. Not Centralized exchanges and not token projects that think their work ends after fundraising. The harsh environment of 2022, which often felt like punishment for the loose interest rates and excessive wealth creation of 2020-2021, punished bad actors and greedy entrepreneurs.

This might be a good thing for the long-term health of crypto. The industry might be growing through a reset and a shift back to the early days of Bitcoin when self-custody was far more common. The reset may be one that is enforced, and FTX may be used as a smoking gun and as evidence as to why centralized crypto exchanges need to be heavily regulated.

There are indications that it is becoming safer and easier to trust no one. Hardware wallet infrastructure is becoming more complex and interesting. This is beneficial to any user in the space, that now more than ever needs functional, efficient self-custody solutions.


ADVERTISE WITH BRAVE NEW COIN

BNC AdvertisingPlanning your 2024 crypto-media spend? Brave New Coin’s combined website, podcast, newsletters and YouTube channel deliver over 500,000 brand impressions a month to engaged crypto fans worldwide.
Don’t miss out – Find out more today


ADVERTISEMENT
Advertise with BNC
ADVERTISEMENT
Advertise with BNC
BNC Newsletters: A weekly digest of the most important news and analysis.
ADVERTISEMENT
Advertise with BNC
Submit an event on bravenewcoin.com
Latest Insights More
ADVERTISEMENT
Advertise with BNC