Centralized Finance vs. Decentralized Finance

2022 was marked by a steady stream of hacks, fraud and rapid unraveling of major crypto entities culminating in the bankruptcy of FTX in November 2022. It’s interesting to note that many of the problems arose in centralized crypto players – exchanges, custodians, lenders, etc. The decentralized segment of the crypto market, or decentralized finance (DeFi), came through relatively unscathed.

Blockchain generally and crypto specifically were born from decentralization – a move away from relying on third part intermediaries. Despite that, large segments of the crypto market have collected in a limited number of centralized (privately-owned) entities. Think Coinbase, Binance, Kraken, etc.

It wouldn’t be surprising if we saw some of this centralization get broken apart in 2023. There is no inherent reason why one party needs to control custody of your digital assets, provide brokerage services, and act as a market maker. Look for some of these large, centralized entities to get disaggregated in 2023 and beyond.

While the idea of a more decentralized world makes some people nervous (especially if your business is a trusted third-party intermediary), centralization to date has meant less transparency and more off-chain transactions. Decentralization will help to fix that with full transparency and more on-chain transactions.

We will also see more permissioned DeFi use cases emerge and establish themselves as the middle ground for centralized entity management, and as the fully autonomous, peer-to-peer decentralized use-case at the root of cryptocurrency finance.