In November 2022, the blockchain world was hit with another major scandal. This time the culprit was the third centralized exchange in the world, FTX. It emerged that FTX CEO Sam Bankman-Fried had illegally transferred over 10 billion US dollars of FTX user funds to its sister company, Alameda Research.
The scandal sparked an extreme reaction in the community, with users attempting to withdraw their funds and being unable to do so. Once the full extent of the fraud was exposed, FTX imploded, its trillion dollar valuation rapidly shrinking. FTX is no longer operational, with their site being replaced with details of their bankruptcy agreement.
Along with scaring the cryptocurrency community and driving prices down in the market, this event caused a ripple in centralized exchanges. People were suddenly extremely worried about where their funds were and whether the centralized exchange they were trading with was handling them properly.
In the months following these events, centralized exchanges such as Binance, CoinbaseAnd StormGain responded to the FTX implosion in several ways. Mainly, through the publication of supporting documents of reserve. However, this is not enough. In this article, we’ll dive into the reactions of these three exchanges, demonstrating that StormGain is rapidly gaining community favor on Coinbase and Binance.
The rise of proof of reservations
In the days following FTX’s misuse of user funds, major centralized exchanges scrambled to distance themselves from the former third-largest CEX. The first reaction, initially seen within Binance, was to release a proof of reserve document.
In a PoR document, companies can list and verify the digital assets they have. For investors and users who have money stored on a platform, this is a move towards transparency, showing everyone that their money is exactly where they think it is.
Each PoR document is audited and verified by an independent party, often by another centralized third party. Binance first released this document to demonstrate that their user funds were still on the platform. If FTX had been asked to produce one a few months ago, it would have quickly been revealed that their money was not where they advertised.
After this first release, other large centralized exchanges quickly jumped on the trend. Coinbase even published a document who explained to their community what a PoR is and how it works.
When a centralized exchange publishes a PoR, it shows the world that it has available user funds. This means that if a user wanted to withdraw their own funds, they could do so. This, of course, directly reacts to the freezing of FTX user accounts and preventing them from liquidating their money.
The tendency of exchanges to freeze user accounts is unfortunately much more common in centralized exchanges than we would like to believe. Apart from the FTX scandal, centralized exchanges are also known to freeze user accounts based on geographic legislation and policy. For those looking to cryptocurrency as a truly decentralized form of finance, this is an alarming sentiment.
Beyond documentation
Binance, Coinbase, and a slew of other centralized exchanges have released their proof of reserve documents. While this has appeased some members of the blockchain community, others are not so convinced. As CEO of OSL, Wayne Trenchpoints out, these documents lack “audited fiduciary reserves, customer and company liabilities, company loans, and most of the other required information needed to determine a company’s financial health.”
Many people in the community do not fully trust the reserve evidence that these companies have published. In fact, this event has further called into question why sites like Binance and Coinbase have not shared proof of their outstanding debts or current liabilities. For companies that prioritize transparency and trust, this is an alarming situation for many investors.
Although a Proof of Reserve document provides some relief, there is still a fundamental problem with centralized exchanges. By definition, cryptocurrency is a decentralized financial medium. Yet, by trading through centralized companies, true ownership of the cryptocurrency is taken away from the customer.
After what happened with FTX, many are not happy with having their cryptocurrency held in a centralized platform. This reaction has prompted some more progressive exchanges, like StormGain, to take action.
Following the events of FTX, StormGain – known for its commitment to its community – quickly built and launched a decentralized exchange. This platform leveraged community support and backing from their centralized exchange, but provided a space where users have even more control over their finances.
This got a huge positive reaction from the community, showing that the blockchain world appreciates the extra options. By giving their community a choice in how they hold and use their cryptocurrency, StormGain has made the executive decision to foster the true principles of the decentralized world.
If other centralized exchanges want to see the level of community support, trust, and customer power that StormGain has become known for, then following in their footsteps and providing flexible ways to invest would be the way to go.
Final Thoughts
While the FTX scandal was a tumultuous time in the blockchain world, its aftermath seemingly creates a safer place for everyone. At the very least, centralized exchanges are now starting to release additional documentation proving where they keep user funds. On the other hand, we have seen StormGain set an exciting and impressive precedent, innovating its CEX model in favor of a new decentralized exchange. If community reaction has anything to do with it, StormGain is likely to have an innovative year on the horizon.