In an excerpt from the Bankless blog, Coinmetrics co-founder Nic Carter debated the issue of trust in what he called “crypto-banks,” or cryptocurrency exchanges. Along with the growth of Bitcoin, these cryptocurrency exchanges have evolved and turned into full-reserve banks. And as more and more trading tools are coming out, many users are choosing to expose these experiences through centralized monitoring.
Are Bitcoin and Ethereum centralized?
The term decentralized currency denotes a cryptocurrency based on mathematical and economic logic, mined from Blockchain and stored in a person’s digital wallet, with a private key.
While mining is a complex function of computing expertise, the acquisition of Bitcoin is primarily from these cryptocurrency exchanges. These cryptocurrency exchanges have grown along with the broader industry and turned into full-reserve banks.
These cryptocurrency banks have come to account for a large and growing supply of significant cryptocurrencies. When staking, lending, and interest-bearing instruments appear, many users are choosing to expose these experiences through focused supervisors.
Bitcoin oversight means that Bitcoin in any intermediary stores non-owned cryptocurrencies, accounting for 20% of the total supply. This number will increase even more if excluding the lost coins. And when comparing this deposited Bitcoin based on supervisors, Xapo and Coinbase make up a large part.
Source: BTC with custodians, Bankless
The acquisition of supervision has been accelerating since 2017 when Bitcoin gained attention from the mainstream. Carter calls this trend an online alarm, reporting that stored Bitcoin is growing much faster than the supply of Bitcoin.
Ethereum is similar. Apart from a large chunk in custodians, ETH is still present in the Genesis Block. In 2016, Poloniex and Kraken held a significant portion of ETH in their coffers. Yet, now the distribution is spread widely across cryptocurrency banks, with Bitfinex and Huobi accounting for the majority.
This spread of supply among supervisors has a lower limit and does not take into account smaller and irregular exchanges. The actual supply dilution may be higher than it was.
Source: Bankless
Do we believe in the exchanges?
With data on cryptocurrency banks holding alarming amounts of Bitcoin and Ethereum, Carter questions what proportion of individuals trusting these banks trust their owners, especially in unforeseen events like bankruptcy or insolvency. In his words, this is a tough question about minimizing trust in the context of deposit-taking organizations.
Carter concludes:
“We are prioritizing minimizing trust when open protocols are considered, but as soon as assets become impounded, we remove them and think the funds are hazardous. And users to blame for trusting. an exchange in the first place.”
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