From CeFi to DeFi: What Do Investors (Mis)Trust?

A prevailing narrative of the rise of Bitcoin and decentralized finance (DeFi) is that they provide a “self-custody” solution to mitigate the misappropriation problem in the “institution-custody” model of centralized financial services (CeFi). The bankruptcy of the leading cryptocurrency exchange FTX severely impacted the trust of global cryptocurrency investors in centralized exchanges. Countering the prevailing narrative, our research on this trust failure reveals that users did not subsequently adopt decentralized alternatives. Instead, they chose seemingly more reliable centralized exchanges based on their size and level of disclosure. The lack of migration is due to a limited understanding of DeFi. When users are informed about DeFi’s features, 30 percent more users will migrate to DeFi. This study reveals the importance of popularizing knowledge about decentralization and strengthening the regulation of centralized financial institutions.