Synchrony
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Synchrony

Why DeFi is the Best Alternative to Centralized Finance.

The last several days have been disastrous for crypto markets. Even though the FTX aftermath has left some users unscathed, this recent scandal has damaged the general public’s perception of the cryptocurrency industry.
Although all the details have yet to be discovered, it’s obvious that FTX entirely disregarded its obligation to accept and protect consumer deposits.
More than 95% of the bitcoin trading market is currently under centralized exchanges (CEXs) authority. The Block estimates that CEXs processed almost $14 trillion in volume last year, whereas DEXs only handled $1 trillion.
Centralized exchanges with high trading volumes, including Binance, Gemini, Coinbase, and Kraken, have attracted retail investors by using effective marketing strategies, user experience enhancements, and the supply of educational resources. Many of these investors require a simple alternative for purchasing and trading cryptocurrencies.
However, the dominance of highly centralized entities may threaten the long-term viability of cryptocurrencies. CEXs are naturally opposed to one of the fundamental components of blockchain, which is to enable people to have decentralized control over information and assets.
Today, creating an account on a centralized exchange includes submitting personal data, such as email addresses, locations, government IDs, and residential addresses. This is a part of broader efforts to abide by regional and global Know-Your-Customer (KYC) and Anti-Money Laundering (AML) laws.
The apparent trade-offs that such KYC/AML procedures encourage are well-documented in articles like these from Coindesk and Bitcoin.com, even if centralized exchange CEOs claim that these regulations assist in safeguarding consumers from illegal trading or hostile traders.
Due to the promising KYC and AML procedures, users of centralized cryptocurrency exchanges are not worried about hackers acquiring their personal information. Centralized exchanges have become appealing targets for thieves due to the size of the assets they hold.
For many cryptocurrency owners who should have known better, the FTX liquidation has been a nightmare.
However, many newcomers are regrettably discovering the hard way that centralized exchanges aren’t the best place for your coins to be.
“Take charge of your keys if you want to own your future.”
Andreas Antonopoulos, a specialist in Bitcoin and open blockchain, coined the saying, “Not your keys, not your crypto.” The saying describes how you ultimately lose control over what would otherwise be your crypto if you give your public-private key combination for cryptocurrency to someone else, such as a centralized exchange.
The above “Not your keys” directive has never been more crucial than it is now, in the wake of the catastrophic FTX collapse, when the majority of individuals and projects that stored their funds on the centralized exchange (CEX) now stand to lose everything they had on the platform due to the FTX disaster.
The FTX disaster serves, if anything, as a failure of the centralized financial systems that DeFi has been striving so hard to replace.
To understand the difficult origins of the FTX crisis. The fact that FTX lent out client deposits rather than keeping them as redeemable 1:1 deposits was a red flag. To make matters worse, they excessively leveraged their balance sheets by using their illiquid FTT token as collateral rather than safer investments like stablecoins. In other words, FTX attempted to act like a bank when it wasn’t supposed to and failed miserably.

Why DeFi
Take a look at Uniswap, the largest trading platform on DeFi.
Because there aren’t individual “deposits,” Uniswap users wouldn’t worry about Uniswap misusing client deposits. Users execute trades in the hundreds of permissionless liquidity pools, unlike FTX, where users must deposit money before trading on a matched order book.
Liquidity providers and yield growers who contribute capital to these pools are also unconcerned about Uniswap trading their deposits. The immutable smart contract logic governing these liquidity pools prevents Uniswap from acting strangely with its customers’ money.
Uniswap is not entitled to use your money as leverage in their trading or to lend it to their buddies. The rules they have established for themselves bind their actions.
Any lending or borrowing DeFi platform — for example, Aave or Compound — operates in the same manner. To borrow money on Aave, you must first deposit money with a secured loan-to-value ratio. Aave will immediately liquidate your loan if the value of the collateral serving as security for the loan drops below a certain level. In contrast, FTX made several loans to its sister hedge fund Alameda, which were later used as collateral for loans on other investments.
Decentralized exchanges represent this industry’s best opportunity of becoming trustless, with institutions free of corporate interests.

The offer has significantly changed these last few years as DEXs improve and more projects and teams build within the DeFi space.
As the blockchain industry reaches maturity and decentralized finance continues to prove the importance of its mission and values, we will see DEXs become even more intuitive and easier to use, with users’ interests and safety at their core.

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Adegbite Mubaraq

Blockchain Copywriter and Marketer |Technical Analyst |Budding Financial Engineer