The crypto crash broke 3 big centralized DeFi companies, but not the 3 big DeFi exchanges.
3 Arrows Capitol, Celsius, Voyager are three centralized exchanges expected to declare bankruptcy.
Together they represent almost 60 billion in investor deposits.
All three halted investor trading, investor withdrawals and froze investors funds.
‘One is charged with criminal charges by government authorities.
Two have sought protection from creditors in court.
All three share a common trait: centralization and a lack of transparency.
It is useful to note that all three are considered CenFi or centralized finance in the cryptocurrency world, which means amongst other things that: investors funds were in exchange wallets, and under the exchanges complete control.
The investments made by the exchanges were veiled in secrecy.
There was no way for investors to know what the exchanges were invested in or whether they had enough funds on hand to cover withdrawals.
So none of them provided transparency in what they were investing investors deposited funds in…
And it turns out that all three engaged in high risk, unsecured loans with investors funds, either directly or indirectly.
All three have suffered catastrophic losses and don’t have the funds remaining to cover investor withdrawals.
‘All three have denied investors access to their fund’s indefinitely.
DeFi has not failed
- In contrast, the three largest decentralized exchanges: Uniswap, PanCakeSwap and SushiSwap, did not halt trading, did not halt withdrawals and are not freezing investors funds.
- ‘These three exchanges hold No investors funds.
- ‘These three exchanges didn’t invest investors funds in secrecy.
CenFi failed, DeFi was successful.
- The contrast is very clear, the centralized financial entities of cryptocurrency failed their investors.
- ‘Their investors may loose all their funds.
- ‘They have further tarnished the reputation of decentralized finance and cryptocurrency with scandal, huge investor losses and a loss of public confidence in cryptocurrency.
Take home lessons
Self-custody
Self-custody is a means of holding your digital assets by which only you have access to them. This means that you choose not to use a third party, and instead will manage your private key personally.
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- Self custody of funds is not a nice thing, it’s a critical thing. If the investors in these three funds had self custody of their funds, these three exchanges could not freeze withdrawals. And the investors could remove their funds at anytime, including now.
Proof of Reserves
Proof of Reserves is the idea that custodial businesses holding cryptocurrency should create public facing attestations as to their reserves, matched up with a proof of user balances (liabilities).
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- Proof of reserves is not a nice to have feature, it’s a critical feature. If these exchanges had to show every day or even every week that they had enough funds on hands to cover all investors account withdrawals, the investors would know their funds are safe. But in the absence of this, investors don’t know if their funds are safe, and in the case of these three exchanges, their funds weren’t safe, and their funds may have been lost forever.
