Why the fiasco at FTX exchange

Before we look at the fiasco of the FTX exchange and why it failed, it is important to understand the difference between what is a centralised vs a decentralised exchange.

In a centralised exchange, wallets are eliminated when it offers a one-stop offering whereby there is no need for a middle man between the buyers and the sellers. The exchange essentially is the custodian and holding the cryptocurrency on behalf of its customers. FTX operates as a centralised exchange. In this aspect, governance of the exchange is therefore paramount. Imagine what happens if there is bad governance and the exchange simply stopped letting its customers withdraw their assets. There is therefore a need for proper regulation and corporate oversight to safe-guard the interests of the investors.

On the other hand, in decentralised exchange whichare essentially online platforms to connect the orders of the buyers and sellers of the cryptocurrencies. The platforms serve as the facilitation of trades between the buyers and the sellers. The seller or buyer still needs to hold the crytocurrencies in his own wallet. Hence it is a form of self-custodian of your own asset in cryptocurrencies. This however is a bit more complex than the centralised exchange. One needs to be savvy in getting into the market and navigate through the trading process.

It is paramount that you be the self custodian of your cryptocurrencies as you would be storing them in your wallet and not be subject to any restrictions imposed by the exchange if they encounter any difficulties, for example if it is under cyber attacks or if it faces financial problems. There is a risk that you would lose all your cryptocurrencies.