CEXs should adopt DeFi’s transparency

Justin Sun thinks centralized exchanges (CEXs) could learn a lesson from decentralized finance (DeFi).

The entrepreneur and diplomat who founded the Tron blockchain spoke at a roundtable at Philippine Blockchain Week in November 2022. The discussion inevitably turned to the newsmaking collapse of FTX and the broader implications for the public’s perception of crypto.

Sun pointed out that one of the issues at the heart of the FTX fiasco was a lack of transparency between the CEX and its users regarding how user funds were being managed and how FTX handled its reserves. The Tron Founder contrasted this lack of transparency with DeFi, which utilizes smart contracts to execute and transparently log each transaction directly on a chain without the need for involvement from an intermediary.

“One of the reasons we trust DeFi is because most of the information is transparent to customers,” said Sun.

From CEXs to DEXs

The public fallout of FTX’s crash has significantly affected activity across CEXs in the weeks since the news broke.

According to CoinTelegraph, in the week immediately following the FTX collapse, aggregate bitcoin balances on exchanges declined by a record 72,900 BTC in one week. An analysis of baskets of CEX and DEX assets by Delphi Digital found that the DEX assets increased by 24% while CEX assets were down 2%.

This activity indicates a shift in public trust after FTX, which was one of the largest and most high-profile CEXs. But now it was discovered to have mismanaged customer funds. The problem at FTX appears to be that customer funds deposited on the exchange were used to make risky investments by FTX’s former CEO, Sam Bankman-Fried. SBF diverted the funds to Alameda Research, which is a hedge fund that he also ran. Bankman-Fried was arrested by authorities in the Bahamas on Dec 12, 2022, on fraud charges.

For Sun and other cryptocurrency entrepreneurs, it will be crucial to distinguish the industry’s future from what went wrong at FTX. Decentralization and transparency could be key to this process of regaining public trust.

FTX acted as an intermediary for its customers, who didn’t have self-custody of the crypto wallets used on the exchange. Instead, customers would deposit funds on the exchange, with FTX handling the transactions using its custodial wallets.

By contrast, DEXs enable direct peer-to-peer transactions from personal wallets, with users maintaining self-custody of the wallets. This means there’s increased transparency regarding the movement of funds on DEXs, as there’s no need for a middleman who could potentially mismanage funds.

While there remain advantages to CEXs in terms of accessibility, DeFi has also risen in popularity in recent years. DEXs have developed more user-friendly interfaces while drawing lessons from the popularity of CEXs.

Justin Sun’s point at the roundtable was that CEXs could learn from DEXs and emphasize transparency regarding how assets are moved on an exchange and what reserves are used to secure an exchange’s activity.

What’s Next for Justin Sun?

Sun stepped down as the CEO of Tron and embraced decentralized governance as the protocol became the world’s largest decentralized autonomous organization (DAO). He then accepted a position as Ambassador and Permanent Representative to the World Trade Organization for Grenada. Sun also recently became a member of the global advisory board of Huobi, which helps to guide the crypto exchange through a rebranding and international expansion push.

Sun remains actively invested in the industry’s future as one of its most high-profile leaders. He’s consistently earned the public’s trust by supporting tangible use cases for blockchain technology and innovation in the pursuit of Web3.

Recently, this has included helping the government of Dominica launch the first-ever national token, Dominica Coin (DMC), and establish a government-supported blockchain economic infrastructure for the country using the Tron chain.

In terms of FTX, Sun has hinted that he may acquire some of the assets from the portfolio of FTX Ventures, which is the venture capital arm of the exchange. While FTX is liquidated through its bankruptcy proceedings, these assets include various blockchain projects ranging from NFTs to DeFi platforms. Sun could look to guide these companies with an emphasis on decentralization and transparency.

“FTX Ventures still has lots of portfolios (companies), and we are going through them one by one, but right now, it is already in the Chapter 11 process, so it might take a longer time to finish the process,” said Sun at a recent Reuters Next conference.