Centralized exchanges aided early mass crypto adoption. Decentralized exchanges will promote that
Centralized exchanges (CeFi) have contributed to the early adoption of crypto by the masses, but have suffered from many recent failures. In the long term, decentralized exchanges (DeFi) will power the backbone of future financial systems, panelists said on stage at “DeFi vs. CeFi: A Distinction With a Difference” at CoinDesk’s Consensus 2023 conference in Austin.
The main obstacle to mass adoption of crypto has been the complexity of the technology for average users, which is why centralized exchanges such as Coinbase (COIN) have been able to act as an early introduction to crypto for many people jumping from the traditional fiat economy to digital assets.
“If my grandparents wanted to buy bitcoin, are they going to download Metamask, figure out how to hold their own keys and all that? Probably not,” said Nathan Cha, head of marketing at crypto derivatives exchange dYdX during the panel.
However, the lack of transparency in a CeFi exchange is what ultimately led to failures like the spectacular collapse of FTX last fall. When a customer uses a centralized exchange, money goes into a wallet, but everything behind it is controlled by an entity that is not transparent and does not use blockchain infrastructure, said Sidney Powell, CEO of crypto lender Maple Finance, using BlockFi and Celsius as an example.
“In effect, it was a private ledger,” Powell said. However, that is not the case for DeFi as there is more transparency in how the money is stored and moved. “If you contrast that with, for example, DeFi lending, whether it’s Aave, Compound or Maple, you can see the movement of funds at all times, and it’s always controlled using Solidity and using smart contracts,” he added to.
“The core difference [between CeFi and DeFi] is … self-storage, but more than that, from a technology perspective, it’s the use of smart contracts and a blockchain to actually run the business,” Powell said.
However, that does not mean that there will be mass adoption of the DeFi ecosystem anytime soon, as CeFi is still likely to be the main route, in the short term, for traditional financial customers and legacy users to adopt the digital assets.
