The Idea of “Safe Cex” Should Stay in 2022

While a questionable play on words might have temporarily licked the wounds of crypto Twitter last year, its time in the spotlight is over.

The phrase that made the rounds following the FTX fallout seemed to ease some pain among traumatized crypto investors. But, while those who were well-receiving of the headline enjoyed the opportunity to refocus their gloom, the industry's cry for a "new year new me" means its explicit attention has to end.

The problem with “safe CEX” picking up traction lies not just in the thought of trying to explain the concept to crypto-confused relatives. What was more concerning was the ‘safe haven’ stamp the entire idea seemed to slap onto centralized finance. 

Following a number of Twitter-based discussions by industry leaders, the term began trending among the crypto community towards the close of last November. The energy across the space felt different from the weeks before it, with an oozing sense of optimism for the future vision of crypto… only, one that would exist in the hands of centralized entities.

After 14 impressive years of tirelessly resisting the endless restraints thrown against building a truly decentralized financial market, how have we ended up here?

Safe CEX was derived from a place of good intention. 

By theorizing what ‘safe CEX’ might look like, those championing the term (Vitalik, Balaji) have managed to establish measures to calm the hysteria and provide comfort for the millions of CeFi users in dire need of a guiding force. Equally, the concept in itself sets a fair precedent. By encouraging demand for more transparency from CeFi networks and implementing additional measures –  like ‘proof of reserves’ – on centralized products, a reformation of CeFi is a rational and essential next step that absolutely deserves a place for discussion. 

Rational, essential, sure. But crypto wasn’t born to improve centralized finance – it was born to demolish it.

2022 was an exhausting year for the financial sector. Global economies have seen record rates of inflation and disproportionate financial strains impacting millions of people’s livelihoods. Crypto projects like Terra Luna shook the entire crypto industry, further proving the need for trustless and secure DeFi. Most recently, the mass implosion of CeFi projects like FTX once again set industry growth back a notch and offered a stark reminder that removing central authority from finance is literally why crypto exists.

So why in the world is our next step from here to put a hard focus on innovating CeFi?

Commodity-backed and fiat currencies have had centuries to evolve (and they’re certainly far from perfect), so to expect a full shift from CeFi to DeFi overnight off the back of a couple of TradFi-esque scandals would be absurd. Even more absurd, would be the expectation of an entirely new financial ecosystem to be polished and ready to support a shift from centuries-old systems in 14 short years. Yet, in either case – that doesn’t mean the shift isn’t needed.

If we’re ever to have a fair financial infrastructure, we need to migrate to DeFi – but DeFi today isn’t ready for us. 

DeFi is stiff, ugly, and flawed. What’s currently out there needs a hell of a lot of work before we can start sharing our favorite dApps at the dinner table and splitting the bill in two taps, so, looking towards improvements that can be made across the CeFi landscape is somewhat fair – for now. 

The seemingly linear focus applied to improving CEXs, though, is where the problem’s at. Current market sentiment for the most part makes it seem as though we’ve reached our limits with DeFi - like we bit off more than we could chew trying to build a world too far out of reach. But, DeFi is why we’re here. CeFi is little more than its problematic sibling that inherited the family’s bad genes.

It’s easy to get caught up in FUD and seek refuge in the devil we know, but zooming out and remembering just exactly why we are here almost feels like being woken up from a chaotic coma. It’s meditative. 

The CeFi echo chambers following the FTX fallout are deflating. Yes, we need to improve CeFi. Do we need to make improving CeFi the industry-wide roadmap, kicking the DeFi can around to infinity? Absolutely not. 

Proof of reserves will bide well in theory. In practice, implementing the concept industry-wide should hold exchanges accountable for showing they have the funds to pay back users en masse, should the need ever arise. 

While this paints a pretty picture, the fall from grace is this: they’re still centralized. 

Piling up the pitchforks to demand more transparency isn’t a bad idea, but, this offers little when it comes to what centralized platforms do with those funds. The need to remove central authority in finance is not about liquidity, but rather, general ownership and management of an individual’s assets. 

Following the FTX fallout, “next-gen” UK bank Starling announced they would block customer transactions to crypto-related applications, once again raising ethical questions around financial authority in the traditional world. It wasn't long ago that protestors in Canada had their crypto wallets sanctioned. How would proof of reserves prevent misuse of centralized power in such circumstances? 

So, onto the next solution – and many have been explored. How do we make CEXs non-custodial? Can we shift towards hybrid centralization? While these explorations make sense amidst the current chaos, they also beg the question: where are we going with this?

It seems in hybrid ideations bouncing between CeFi and DeFi, each possesses a common denominator. More CeFi = more centralization, and more of today's DeFi = less usability & more room for user error. So surely, when zooming out a little and looking at the bigger picture, there’s only one true solution, right? 

While we can pace in circles until the end of time discussing how to improve centralized finance, a faster horse won’t win this race. A better approach might be focusing efforts on the end goal that has remained just about the only constant in the 14 years of crypto’s development: better decentralization.

Linus Pauling once wrote, “The way to get good ideas is to get lots of ideas and throw the bad ones away.”

We’ve gone above and beyond to deliver on that first step for crypto, but it’s time to start realizing the second.

While there are many incredible developments and advancements in the DeFi space, they’re still blocked by the same foundational flaws that are restricting them from achieving what’s really needed for global adoption – like poor usability, security, scalability, and developer experience. 

If the financial landscape is ever to become truly decentralized, we must build an ecosystem that can support it and an infrastructure purpose-built for it, not cobbled together or accidentally emerging. Groundbreaking innovation doesn’t come from tweaking what’s broken – it comes from radically changing it. We’ve spent far too long taking what we’ve got and sticking a band-aid over the bruised parts, but that’s never going to work in the long run.

Redrafting CeFi might help for now, but we need a profoundly different approach to building if we plan to sustain a $400T financial migration. It may feel like a lost cause at times, but DeFi will prevail because those that know what really needs to be done will make it happen. 

To truly build the future of finance we need, we must stop looking for answers in CeFi and now place our efforts on making DeFi win. For DeFi to win, it needs to work for everyone.

“Safe CEX” isn’t what we need, DeFi is.