Thread by @Brett_FTX

1/ Reports on token ownership concentration and DeFi transaction volume often come to incorrect conclusions when centralized exchange hot wallets are involved. Here’s some background on how exchanges typically operate these wallets:

2/ A centralized exchange functions as the custodian for all customer assets. Trades between two counterparties can occur and settle instantaneously by using an internal ledger, only interfacing back with blockchains when customers deposit and withdraw.

3/ To simplify the operational aspect of deposits and withdrawals, centralized exchanges often accumulate customer tokens into a single or small number of wallets, rather than requiring a separate on-chain wallet per customer (as would be the case with a decentralized exchange).

4/ If a blockchain’s protocol supports adding a memo to deposit transactions such that the exchange can identify the customer from the deposit payload, then the customers can deposit directly into the exchange’s hot wallet.

5/ If not, then often exchanges will provide a unique wallet for the customer to deposit into, and then will sweep the customer funds into an exchange hot wallet for aggregation, soon after the deposit occurs.

6/ Then all withdrawals will be just transactions with the exchange hot wallet as sender, regardless of which customer it came from. And trades between customers on the platform are just internal database operations.

7/ Lack of knowledge of this operational setup leads to frequent mischaracterizations of on-chain data. Some typical examples of the forms these mischaracterizations take:

8/
-Claims that most tokens are held by only a few “whales”
-Claims that an “exchange is buying/selling tokens”
-Claims that one of these exchange wallets has over-centralized a DeFi governance protocol

9/ If these claims are based on assumptions that don’t properly account for how exchange hot wallets work, they’re most likely untrue.