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Failure of FTX was Failure of Centralization?

  • The failure of FTX may signal a necessary reset for the crypto sector ahead of a rebound.

  • The debate among users about the usage and reliability of CEX emerges.

  • Bitcoin & Ethereum are designed to avoid such crises.

18-Nov-2022 By: Ashish Sarswat
Failure of FTX was F

There's no denying that the whole of 2022, particularly November, 

Has been extremely detrimental to the digital asset market as a whole. 

In this regard, FTX, which was widely considered as one of the world's largest centralized cryptocurrency exchanges until last month, was hit with a major scandal that led the company to disintegrate seemingly overnight.

The crisis sparked due to the magnitude of the liquidations. FTX was unable to fulfill its withdrawal requests, which were estimated to be worth $6 billion in just 72 hours, resulting in a significant liquidity crunch.

But one thing to keep in mind is that centralized exchanges are recognized for having excess liquidity, so why has FTX experienced a liquidity crisis?

Why does FTX face a liquidity crisis?

The cryptocurrency exchange FTX experienced a liquidity crisis as a result of its mismanagement of its users' funds and lending those funds to its sister company Alameda Research.

This is not the first time FTX has encountered a liquidity crisis; during the Terra Luna crisis, several exchanges filed for bankruptcy, and at that time FTX faced a massive liquidity crisis.

And this what made users to shift their trading options to decentralized exchanges. However, another thing to be noted here is that this wasn’t reflective of bitcoin or Ethereum as bitcoin totally seems to prefer less centralized transaction channels.

Why BTC & ETH can’t face such liquidity crises?

Due to the decentralized nature of both Bitcoin and Ethereum, these kinds of crises have never transpired with either of them. Since both cryptocurrencies bypass centralized transaction channels, the likelihood of a liquidity crisis is close to zero.

Furthermore, Bitcoin and Ethereum are designed to avoid such liquidity crises because they do not maintain low-quality collateral. As a result, both Bitcoin and Ethereum rebound after a brief meltdown.

What’s next for the crypto sector?

While individuals and experts across the world have urged for increased regulation of the crypto sector, it should be noted that FTX's collapse was due to a failure of the CeFi industry rather than a lack of regulation.

In fact, the entire saga has served as a stark reminder of why decentralization is essential.  As we move toward a future dominated by digital assets, it stands to reason that a growing number of individuals will flock toward DeFi since it represents a technological and financial paradigm change that its centralized counterparts cannot compete with on any level.

Do you think the crypto market will recover soon after this meltdown? What do you think about the future of CEXs? Share your views in the comment section below.

Read also: Should CEX Like Binance Start Building DEX and Defi Products?