A broader discussion regarding the security compromises between centralized exchanges (CEXs) and decentralized finance (DeFi) protocols has been reignited by a recent data breach at Coinbase.
Additional pressure has been placed on the leading U.S. crypto exchange due to the breach, while allegations have been made by the SEC claiming that verified user numbers were inaccurately reported.
In a blog post published on May 15 titled “Protecting Our Customers – Standing Up to Extortionists,” it was disclosed by Coinbase that a $20 million ransom demand was rejected after private customer data had been accessed by attackers aided by bribed “insiders.” Rather than yielding to the extortion, a commitment was made by Coinbase to fully compensate users who suffered financial losses as a result of the phishing attacks that occurred after the breach.
Names, addresses, identification documents, and the last four digits of Social Security numbers were among the information that had been stolen. It was asserted by Coinbase that passwords, private keys, and customer funds remained untouched, and that only 1% of its user base had been impacted by the breach.
It was reported earlier this year by blockchain investigator ZachXBT that more than $300 million is lost annually by Coinbase users due to social engineering scams, underscoring the severe impact that data breaches have previously had on the platform’s users.
Although actions have been taken by the centralized exchange to respond to the breach—including the dismissal of suspected individuals and the announcement of a $20 million reward for information leading to arrests—the incident has highlighted the contrasting security approaches between centralized and decentralized systems.
The Risk of Centralized Weak Links
It was emphasized once again by the Coinbase incident how susceptible centralized systems and single points of failure can be to cyberattacks, according to David Carvalho, founder and CEO of Naoris Protocol, in a statement to The Defiant. He noted that these vulnerabilities are well understood by cybercriminals, who are increasingly refining their methods to exploit them.
It was stressed by Carvalho that the issue is expected to intensify over time, and the sole effective remedy lies in adopting decentralized security that eliminates single points of failure. He further asserted that sensitive information or data ought to be safeguarded through decentralized systems, rather than being entrusted to human intermediaries.
Phil Mataras, founder of the Arweave-powered permanent cloud network AR.IO, shared a view similar to Carvalho’s, stating that incidents of this nature should not merely be regarded as unfortunate but rather as indicative of underlying structural flaws.
It was explained by him that these incidents expose the extent to which crypto infrastructure continues to rely on centralized, non-transparent systems that mirror the weaknesses of Web2. He added that when trust and access are concentrated within a single entity, one mistake or insider risk has the potential to jeopardize the security of millions.
As stated by Mataras, broader security concerns are rooted not merely in faster responses or thorough vetting, but in the foundational system design. He emphasized that systems should be built to reduce the need for trust by default—distributing control, promoting operational transparency, and ensuring that essential data cannot be quietly changed or lost.
The Hidden Dangers of DeFi
It was explained by Carvalho that DeFi platforms come with their own set of security vulnerabilities. He noted that many so-called “decentralized” exchanges remain reliant on centralized elements such as frontend interfaces hosted on conventional servers, APIs operating on corporate infrastructure, oracles retrieving data from centralized providers, and cross-chain bridges overseen by limited groups of developers.
It was further noted by him that when these components experience failure—commonly seen in bridge breaches and oracle tampering—the illusion of decentralization is swiftly dismantled.
Carvalho stated that even when the blockchain layer is decentralized, centralization within the surrounding infrastructure stack still exists, creating security gaps that can be identified and exploited by advanced attackers..
It was also mentioned by Patrick Young, head of Galxe, in a statement to The Defiant, that although decentralized exchanges (DEXs) provide users with greater control, they occasionally fall short in delivering robust identity protections, making them susceptible to bots, sybil attacks, and front-running tactics.
According to Young, what is required is a transformation in the approach to identity and verification across both centralized and decentralized models—solutions that go beyond data collection to safeguard it, while also allowing platforms to confirm legitimacy without compromising privacy. He emphasized that the focus should not be on selecting DEX over CEX, but on ensuring that both paths are constructed to be secure, compliant, and capable of building user trust.
SEC Launches Regulatory Inquiry
It was confirmed by Coinbase on Thursday that an investigation had been launched by the U.S. Securities and Exchange Commission (SEC) to determine whether the company had misrepresented its user statistics. The inquiry specifically focuses on the reported figure of “verified users,” which Coinbase has stated exceeds 100 million.
Based on information provided by Dune Analytics, approximately 167 million unique addresses are hosted by Coinbase. However, in a recent filing submitted to the SEC, it was reported that the platform had about 9.7 million monthly transacting users during the first quarter of 2025.
In a statement, Coinbase’s chief legal officer, Paul Grewal, explained that the investigation is a continuation from the previous administration and pertains to a metric that had not been reported for the past two and a half years, with full disclosure having been made to the public. He clarified that the “verified users” figure encompassed individuals who had verified either their email address or phone number with the platform, which may have resulted in an overstatement of the actual number of unique customers.
It was added by him that, although the continuation of the investigation is not deemed necessary, full cooperation with the SEC is being provided by Coinbase.
It was reported earlier this week that Coinbase is set to be added to the S&P 500. Shortly thereafter, a rise in its stock price was observed despite the surrounding negative news. At present, COIN is being traded at approximately $264, reflecting an increase of around 8% for the day.
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