Confidence is quickly eroding in the crypto sector, as it faces a wave of bankruptcies and investigations into Sam Bankman-Fried and his failed exchange, FTX, for losing and misspending billions of dollars in user deposits.
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Ever since liquidating all of their assets and buying bitcoin in 2017 back when it was trading at around $900, the Taihuttus have safeguarded their crypto riches in three main places: centralized exchanges (CEXs) like Bybit and Kraken, decentralized exchanges (DEXs) like Uniswap, and hardware wallets hidden in secret vaults on four different continents. But as digital asset brokers, lenders, and exchanges continue to fall into bankruptcy — locking up customer funds in the process — the Dutch family of five is proactively moving $1 million in crypto into decentralized exchanges, which allow users to hang on to custody of their tokens.
“For me, bitcoin is still about freedom, and decentralized currency should be able to be used by everyone in the world without needing to do KYC or any other regulatory stuff,” Taihuttu told CNBC, referring to the know-your-customer, or KYC compliance, required by many centralized platforms like Coinbase
CNBC caught up with the 44-year-old patriarch a few days after the family made the move from Lagos, Portugal, to Phuket, an island just off the western coast of mainland Thailand in the Andaman Sea. The family is currently living on 0.3 bitcoin a month — about $5,000 — and they are buying back the bitcoin that they sold when the cryptocurrency was trading at around $55,000 a year ago. For the Taihuttus, the cascade of crypto bankruptcies and failed tokens just shows that “bitcoin is the king” and “completely different than all the other projects.”
While the Taihuttus did not have any tokens tied up with FTX, Celsius, Voyager Digital, or any of the other platforms to recently go under, the wave of failures did remind them of the importance of ownership.
In crypto, one of the mantras is “not your keys, not your coins,” meaning that rightful possession of tokens comes through the custody of the corresponding private keys. DEXs like Uniswap and SushiSwap are peer-to-peer platforms where transactions happen directly between traders, entirely cutting out intermediaries likebanks and brokers. That means that users retain custody of their tokens by never handing over their private keys.
DEXs eliminate centralized intermediaries from financial transactions such as trading, holding, and transferring assets through programmable pieces of code known as smart contracts. These contracts are written on a public blockchain like ethereum, and execute when certain conditions are met, negating the need for a central intermediary. In essence, with DEXs, you trust code, and with CEXs, you trust people.
“You never send your bitcoin to an exchange. Your bitcoin stays in your own wallet, meaning you have complete custody of your coins,” explained Taihuttu. “You connect to a DEX, and by making that connection, you trade out of your own wallet.”
That nuance of ownership is critical.
“If the DEX collapses, it doesn’t matter, because the bitcoin are always in your own wallet,” he added.
Changing their storage strategy
From the beginning, Taihuttu said he could tell something was “really off” with FTX, even though it was one of the biggest CEXs on the planet before imploding in November.
“Too many influencers were paid too much money to promote that one,” continued Taihuttu, who added that reliable crypto products and companies typically don’t rely so heavily upon celebrity endorsements.
The Dutch father of three had learned his lesson in 2017, when he lost four bitcoin to a hack of a centralized exchange known as Cryptopia.
“From that moment, I was always searching for alternatives,” he explained.
People who choose to hold their own cryptocurrency can store it “hot,” “cold,” or some combination of the two. A hot wallet is connected to the internet and allows owners relatively easy access to their coins so that they can access and spend their crypto. The trade-off for convenience is potential exposure to bad actors.
“Cold storage often refers to crypto that has been moved to wallets whose private keys – the passwords that enable the crypto to be moved out of the wallet – are not stored on internet-connected computers, so that hackers can’t hack into the computer and steal the private keys,” said Philip Gradwell, chief economist of Chainalysis, a blockchain data firm.
Thumb drive-size devices like a Trezor or Ledger offer a way to secure crypto tokens “cold.” Square is also building a hardware wallet and service “to make bitcoin custody more mainstream.” The Taihuttu family has largely relied on cold storage to safeguard their tokens for the last six years.
Currently, the Taihuttus keep 27% of their crypto holdings “hot” on centralized exchanges like Bybit, a platform which Didi says is transparent and backed by real assets. He also keeps some tokens on Kraken, since it is one of the oldest exchanges. Didi refers to this crypto stash as his “risk capital,” and he uses these crypto coins for day trading and potentially precarious bets.
The family declined to say how much it holds in crypto, but they did disclose that they are shifting $1 million worth of bitcoin, ether, litecoin, polkadot, and other tokens from these hardware wallets and centralized exchanges to decentralized exchanges.
Tainuttu says he ultimately wants to move 100% of the family’s crypto savings into DEXs and invest 15% of their net worth into upstart DEXs since he sees these decentralized platforms as the centerpiece of the next bull run. When asked why he is going all in on DEXs instead of keeping his crypto cold, Didi pointed to ease of access.
DEXs allow Didi to connect the crypto he safeguards on thumb drives in hiding spots all over the world directly to the platform, meaning that he can make trades far more easily, while still protecting his tokens.
“Our capital now is really difficult to use in trading, because then I need to send my bitcoin from my ledger into an exchange,” explained Taihuttu.
The financial privacy offered by DEXs is also a huge incentive.
“You’re trading from an anonymous ledger on an exchange as an anonymous entity,” he said. “You get full access to non-KYC trading in a decentralized way on a DEX.”
Taihuttu isn’t alone in shifting his focus to DEXs.Following the FTX bankruptcy, Trezor’s sales revenue reportedly jumped 300% and billions of dollars in bitcoin fled exchanges. Meanwhile, Multicoin Capital, a crypto investment firm, told limited partners that 7% of its assets are similarly stored cold, in self-custodied multisig wallets.
The pros and cons of DEXs
Centralized exchanges are a big part of what helped spur crypto adoption by offering new investors an easy onramp.
“Centralized exchanges have played a vital role in the adoption of cryptocurrency,” explained Auston Bunsen, co-founder of QuikNode, which provides blockchain infrastructure to developers and companies. “With their growth came the industry’s growth.”
But in the last few years, and especially in the last six months, decentralized exchanges have grown in popularity as investors look to trade in a manner that protects their funds.
Boaz Sobrado, a London-based fintech data analyst, sees three main advantages to DEXs: they are non-custodial, meaning you don’t have to trust someone (like Sam Bankman-Fried) to store your funds for you; they are open, meaning anyone in the world can participate; and transaction data is more widely available, reducing the risk of insiders getting an edge from knowledge only they have.
Uniswap has facilitated more than $1 trillion in trading volume from around 100 million trades since launching in 2018, according to a research note from Bank of America on June 13. Rival DEXs like SushiSwap and PancakeSwap have also gained traction among traders, though Uniswap still accounts for around 51% of all trading volumes on DEXs year-to-date.
While DEXs play an important role in the digital asset ecosystem, there are a lot of reasons why these decentralized platforms won’t eclipse their centralized peers any time soon, according to Alkesh Shah, Bank of America‘s Head of Web3, Crypto & Digital Assets Strategy.
“Centralized exchanges provide a one-stop shop for investing or trading digital assets with someone to speak to if something goes wrong – this will be critical for mainstream adoption beyond the early adopters of today,” Shah told CNBC.
Shah said that investors are likely to prefer exchanges that are more transparent about their operating practices, adding that regulated and transparent CEXs are likely to be important for mainstream adoption long-term.
Bank of America said in its June note that it expected Uniswap, in particular, to face regulatory scrutiny. The bank said it also saw the potential for the Securities and Exchange Commission to require its registration as a National Securities Exchange or broker-dealer.
“Uniswap may be unable to comply with regulatory requirements, given its inability to verify user identities, implement AML/KYC (anti-money laundering/know your customer) requirements or provide the necessary disclosures for the thousands of tokens listed on its platform,” continued the research note.
Some centralized platforms are splitting the difference by offering DEX-type services, but it is unclear what sort of regulatory blowback they might ultimately face.
Meanwhile, Sobrado tells CNBC that at this stage, most DEXs lose money, meaning they might not be sustainable.
DEXs are also automated market makers, meaning that the exchange pools liquidity from its users and then uses an algorithm to price the assets within that pool. Sobrado says that this model has proven remarkably resilient — but is unproven versus orderbook exchanges like Coinbase.
Under it all, the Bitcoin Family still believes that the original cryptocurrency is a solid bet. They say they haven’t been swayed by the turmoil of the last six months.
“We seem to get that lesson every bitcoin cycle,” said Taihuttu. “It was Mt. Gox, it was banning bitcoin in China, it was banning mining. There’s drama every time.”
He continued, “But looking at the current situation: We have a huge war going on, we have a huge financial crisis, we have FTX, we have Celsius, we have a lot of bear market signals. I think that bitcoin is really holding strong at $16,800. For me, bitcoin is still doing perfect and still doing what it always does: Being a decentralized currency that is usable by all people all over the world.”