Centralization vs. decentralization: it’s time to end the year-long debate
This may be crypto’s longest-lasting dilemma: safety vs. functionality, security vs. vulnerability, freedom of choice vs. controlled selection. In a few words: the endless debate on centralization vs. decentralization.
The characteristics we listed above all intersect when we’re talking about wallets, of course, and from then on basically affect the entire user experience of trading and going around the DeFi space. As such, the wallet remains one of the most important aspects of every successful crypto journey. There are centralized wallets, and there are decentralized wallets. Centralization has its pros and cons, decentralization — too. You’ll find supporters on both sides of the spectrum.
But what if there’s no need for two sides? What if we merged the pros and turned the cons down to a minimum? Let’s first take a look at the “traditional” models and see what we can take from them.
Here’s the thing about centralized wallets
Let’s simplify here: by centralized or custodial wallet, what is meant is simply that one governing body is behind said wallet. This body designed, created, and is currently managing the wallet in the background, having control over all the data, seeing all the transactions, owning all the private keys. Now, think of the private key as your personal ID — it is the only way to access your account, i.e. wallet. If we have to continue the allegory, it’s your passport. It’s the key to your safe, but, with regards to centralized or custodial wallets, the actual safe is just not yours.
Instead, the bank gave you a safe, but they keep it in one of their offices. So you can go about your day and open it whenever you want, until one day the bank (read CEX) for some reason decides to lock your account or somehow limit your access to “your” safe. Maybe it denies you the opportunity to withdraw your money right when you need it most, because the market is falling (this has unfortunately happened on many occasions). And just like that, your funds are gone until further notice.
Google how many times centralized exchanges have limited the ability to trade, buy, sell, or withdraw assets, and you’ll see what we mean. The infamous removal of the actual “Sell” button by one trading platform comes to mind…
So as a rule of thumb always remember the old mantra: not your keys, not your crypto.
All for one, one for all?
Custody of the wallet is not the only issue with centralization. There is also what is called “a single point of failure”, which means that one weak link in any centralized system is enough to bring the whole thing down. This rings more true and more painful when we talk about the financial world, and pretty much guarantees that in order to gain access to a high proportion of users’ funds and/or data, all it takes for a malicious actor is to successfully carry out one security breach.
This is of course possible due to the centralized nature of the way data is stored — all in one place, so all it takes to burn many traders is one crack in the system and one person to exploit it. You are not the first target — it’s a server or a centralized exchange’s private keys, for example, but you’re the collateral damage, because your data is just in there with the rest. And your data is the key to the safe.
Considering this, centralization has a long way to go in terms of security.
And finally, but definitely not in terms of importance, there’s the lack of trust aspect, which is a very real one. If you choose a centralized wallet, the owner of this wallet is most probably a large-scale centralized exchange or trading platform. And while the sheer magnitude and scope of such an institution should normally be enough to instill a sense of trust and stability into its clients, crypto has a funny way of turning things around.
Just a week ago, the first crypto insider trading case came to light, adding to the list of doubts that users have regarding the nature of centralized exchanges. Faking trading volume is something else to consider — shady exchanges use the practice to create the illusion that a certain coin is more desirable than it actually is. This increases the overall volume traded on the exchange and makes it look more stable and popular in the eyes of traders. Cases of wash trading in which people behind exchanges have attempted to artificially push the price of a token upwards in order to attract interest from new investors is something that comes up every now and then. Outages, freezing of funds, and general uncertainty, especially in times of market distress, only add to the list of trust issues, but do not exhaust it.
Again, all this is the result of putting all eggs in one basket — a basket that has a mind of its own.
It’s not all bad, though, of course. All this in mind, centralized exchanges can be a pretty reliable choice for trading, not only because they offer round-the-clock high liquidity and high trading volume due to the sheer number of users they attract, but also because these platforms tend to be quite user-friendly. They put the focus on relative simplicity and accessibility, because, naturally, they want to reach more people. They are also very handy in offering an array of useful investment tools that are generally pretty straightforward to use, including various earn products, easy-to-use staking, lending, and others.
On the legal side of things, these exchanges also rely on regulatory compliance and having all the necessary licenses in order to generate a higher degree of trust, which is naturally the only logical thing to do.
So, if we could take centralization apart, here’s what we’d choose to take: simplicity in terms of mechanics and interface in the pursuit of an approachable and satisfying product for a wide user base, even one that is completely unfamiliar with crypto and DeFi; providing access to a wide array of instruments and tools such as trading, staking, swapping, lending, transferring, using leverage, and spending crypto on multiple chains; it would also be incredibly convenient to be able to issue IBANs like a traditional bank, as well as offering debit cards to users; a fiat on-ramp would be incredibly useful in order to simplify crypto purchases and fiat utilization.
Yes, sounds good — this is what we’re taking from centralization into ChangeX. And we are leaving out the obvious security vulnerabilities by going fully decentralized when it comes to wallet design. Still one-sided, though. Let’s see what DeFi offers and how we can incorporate it into our CEX elements.
The case for decentralization
By decentralized wallets we of course mean wallets that don’t rely on a centralized governing body, institution, organization, or foundation that can access, alter, or control funds and data, nor can in any way interfere with or deny you custody of your funds.
Let’s see how decentralization handles things.
Most non-custodial wallets encrypt your private keys by using your seed phrase (these are the 12 or 24 words that you see when creating a new wallet) as a starting point. These words, also called a mnemonic phrase, are then in turn used to access your funds as a sort of password if you switch devices or lose access to your current one. Some wallets store the encrypted private keys locally on your device for your eyes only, and no backups are ever made. Others, like the ChangeX non-custodial wallet, store that information in a distributed way on the blockchain, in our case — on HydraChain.
These two methods offer very high security to your wallet and funds inside, as you are their sole owner — no one, not even the developer behind the wallet, has access to your private keys. Thus, in order to stay protected, all you need to do is to take good care of your device and keep your seed phrase safe — the best way to do that is to write it down on a piece of paper, but never on your computer, not even in the cloud, and them laminate it and keep it somewhere completely safe. Make a backup copy as well. Just in case.
That being done, you can be sure that your wallet is nice and secure, and in order to gain access to it someone would have to break into your house and find the piece of paper. Unlikely.
Security… but also responsibility
This, on one hand, gives you complete autonomy, turning you into your own private bank — you have your office and key to the safe, and you decide when and what to do with your funds.
But it also warrants a high degree of responsibility and accountability — you are in complete control, and everything that happens to your keys or funds falls on you. It’s your keys, and your crypto, but also your fault if you lose your seed phrase.
So, we’ve got security as a major factor to consider when choosing a decentralized wallet.
Another win can be found in the diversity of tokens and chains that you can access via a non-custodial wallet, because it can be connected to a virtually endless amount of blockchains. Add to that access to a decentralized exchange and you have at your fingertips thousands of opportunities that can only be found there.
This is because DEXs can include any token that has been created on the blockchain in question, i.e. you don’t have to wait for a CEX to choose, review, and approve the listing of a given token. They are just there. And while this presents many opportunities for early entry into a project, it can also expose you to scam projects, therefore research is of paramount importance.
You really can’t beat decentralization in terms of abundance.
Accessibility and safety
On the dark side of the moon, there’s the inaccessibility of DEXs to consider. Most decentralized exchanges require a good degree of familiarity with trading, blockchains, types of tokens, liquidity, slippage, pooling, farms, and other terms. This could take a while, especially if you’re a newcomer. Maybe it’s not your thing at all, maybe you just care about making your money work for you.
With many of these DEXs there’s high possibility that you will have a stressful time when it comes to sending or receiving funds, swapping or staking them, as there are no tutorials and no hand holding (mostly). So all DEXs warrant that you know what you're doing, and for that you need to spend some time on education. If a user is unfamiliar with networks and addresses, it’s very easy to lose money in a way that cannot be reversed.
The trust issue we mentioned in the previous paragraph: yes, you have thousands of tokens in your pocket, but there’s zero regulation and control, so all responsibility falls on you. Scams are rampant in the DeFi space and you never know what you’re going to get. This can be both a blessing and a curse, depending on your point of view, so always do your own research and avoid mishaps.
So, taking apart decentralized wallets, let’s take the following: the heightened security of the distributed data storage model which ensures the safety of private keys and funds; the transparency factor of the blockchain which makes sure everything that happens there is visible; the fact that a true DeFi wallet is yours and only yours — no one can shut it off, no one can access it; and, finally, the freedom to access a plethora of tokens on different chains, with cross-chain multi-hop swaps for ultimate trading freedom.
And we can easily leave this out: convoluted user interfaces, too much terminology, basically non-existing interoperability with CEXs and the traditional banking system, and a lot of room for human error.
Hybrid CeFi/DeFi model: here’s what we get
The result of merging centralized and decentralized elements in the ChangeX app is a non-custodial wallet on HydraChain with a strong focus on security. The wallet will offer access to a myriad of tokens on multiple chains, providing opportunities for various combinations and trading and investment strategies.
Leaving out the cons, ChangeX will focus on simplicity and ease of access, so that all users, regardless of their knowledge or ability, can easily enter the world of decentralized finance. No DeFi offering would be complete without access to staking (three types actually — leveraged, locked, and flexible), swapping, and trading, so this comes as a natural part of ChangeX.
At the same time, on the centralized side of the coin, ChangeX will provide access to tools and investment instruments normally seen on a CEX — trading, fiat on-ramp for easy purchases of tokens via fiat currency, a lending market, and using leverage for staking, which will allow for 1.2–2x margin positions on staked assets, amplifying yield.
But that’s not all. Traditional finance is still very much the norm, and it’s still very much cut off from DeFi. This is why your non-custodial wallet will also work as your very own fiat account. Once all procedures have been completed, ChangeX will be able to issue IBANs, and every user will have their own fully functional bank account right there in the wallet, blending traditional into digital. One app that has it all.
Adding the issuance of ChangeX Crypto Debit Cards — another centralized offering — will allow you to spend all of your in-app assets at any place that accepts cards, creating a bridge between traditional finance and DeFi.
Complying with all regulatory frameworks, acquiring an Electronic Money Institution license and a Banking-as-a-Service License in the jurisdictions we operate in will provide additional benefits, such as an added layer of security, transparency, and accountability.
The security and flexibility of decentralization meets the functionality and stability of centralization.
Real financial freedom — that’s what we’re after.
Thanks for reading, really.
The ChangeX team