The cryptocurrency market is often referred to as the Wild West of the financial world. However, the events that have recently unfolded in this space would put even the hardiest cowboys of the old days to shame.
Recall that on November 8, FTX, the world’s second-largest cryptocurrency exchange, faced an unprecedented liquidity crisis about a month ago after it became known that the firm was facilitating questionable transactions with its sister firm Alameda. Research work.
In this regard, as 2022 will continue to be a difficult year for the global economy, the crypto sector in particular has been hit by a series of crises that have had a major impact on the financial outlook and investor confidence in this emerging industry. By this point, since May, a growing number of well-known projects associated with this space, such as Celsius, Three Arrows Capital, Voyager, Vauld and Terra and others, have collapsed within a few months.
The fall of FTX in particular has severely hurt the industry, as evidenced by the fact that since the dissolution of the company, the price of most of the major crypto assets has dropped significantly, and so far there has been no sign of a recovery. For example, in just 72 hours after being developed, the value of Bitcoin plummeted from $20,000 to around $16,000, with many experts suggesting that the flagship cryptocurrency could bottom close to the $10,000-$12,000 range, history. which has been reflected by several others. resources.
What lies ahead for cryptocurrency exchanges?
One of the burning questions that the recent turbulence has brought to the fore is what the future holds for digital asset exchanges, especially centralized exchanges (CEXs). To better understand this issue, turned to Dennis Jarvis, CEO of the Bitcoin exchange and developer of the Bitcoin.com cryptocurrency wallet.
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In his view, CEXs are now facing a huge uphill battle, especially with low revenues and stricter regulation around the corner. In light of the current scenario, he indicated that more and more people are gravitating and will continue to gravitate toward using self-storage solutions, adding:
“Obviously, these centralized intermediaries cannot be trusted. There will always be room for CEXs, but I believe they will play a minor role in the crypto ecosystem in the long run; of course, nothing compares to the huge role they have enjoyed so far.”
Alex Andryunin, CEO of exchange market maker Gotbit, told that there is already a significant surge of institutional interest in decentralized exchange (DEX) trading. By this point, he emphasized that just a couple of months ago (i.e. in September), his DEX-focused profits for his clients were $8 million, but jumped to $11.8 million in the following months, signaling a 50 percent increase despite to a bloodbath around the world. crypto industry. He added:
“In my view, the business models of Binance, Coinbase, Kucoin and Kraken will weather the ongoing turbulence. However, even large organizations like Coinbase are not currently competing with Binance. The company has no major competitors. Even in the US market, Binance US is rising while Coinbase, Gemini and Crypto.com are falling in DAUs as of Q3 2022.”
Gracie Chen, Managing Director of cryptocurrency exchange Bitget, believes we will now see trading ecosystems enter a phase of consolidation and these platforms will come under scrutiny more than ever before. In her opinion, this will create an opportunity for exchanges with sound balance sheets and sound risk management practices to strengthen their market share.
“Ultimately, we believe there will be no more than 10 highly competitive centralized exchanges in the industry,” she told .
Robert Quartli-Janeiro, director of strategy at cryptocurrency exchange Bitrue, has a similar opinion. He told that the collapse of FTX can and should be seen as a historic moment for the industry that will force exchanges to become more professional and transparent in their day-to-day operations.
“Exchanges have a duty to provide the best experience for crypto investors. They should become better and more reliable places to trade. Not everyone will survive, but true bloodlines will survive. It is also important to remember that the role of exchanges is to protect investor funds and secure the market, not to be the market. FTX was wrong,” he added.
Can DEXs fill the void?
While most experts believe that as long as centralized exchanges like Binance and Coinbase continue to maintain reasonable balance sheets, there is no reason for them not to capitalize on their competition. However, Jarvis believes that in the future, these large crypto organizations will feel the heat of competition from DeFi protocols, especially since many people have now begun to recognize the internal problems associated with trusted intermediaries. He further added:
“I think you will see a lot more CEXs start investing in DeFi versions of their CeFi products. However, it will be difficult for them because companies have been building products designed for self-service and DeFi for a long time.”
Similarly, Chen believes that there will be new opportunities for decentralized finance (DeFi) in the near future, adding that most of all centralized crypto services, especially lending/debt services, will cease to exist, stating that the CeFi lending model has proven to work. be relatively unreliable at the moment.
“DeFi will open up huge opportunities for development. Custody services, transparency and first-class risk management policies will become the norm for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still inconvenient for retail traders, adding that there are virtually no quality DEXs today with features such as limit orders. If that wasn’t enough, in his opinion, most of the platforms working in the field today offer an extremely weak user interface.
“Users need to understand concepts related to metamask and other extensions, with many having difficulty entering fiat/crypto data. Even if the average retail trader uses DeFi, they will most likely return to some CEX with a high reserve confirmation rating,” he added.
The future of crypto is tied to the marriage of CeFi and DeFi
According to Julian Hosp, founder of decentralized exchange DefiChain, transparency will be key to how customers continue to choose exchanges going forward. He suggested that pure DeFi would still be too difficult to use for most clients, while pure CeFi would be too difficult to trust, adding:
“Reliable exchanges can increase their stranglehold; however, we will see more and more platforms mixing DeFi and CeFi into CeDeFi, where customers get the same fantastic user experience from CeFi, but the transparency from DeFi. This will be the way forward for crypto.”
Outlining his point of view on the matter, he added that in the coming months and years, DeFi liquidity will no longer be concentrated on one dominant blockchain and will likely spread across multiple ecosystems and protocols, as evidenced by the history of this decade-long market.
Finally, Chen believes that in an ideal scenario, CeFi could provide better products with higher margins and leverage, while DeFi could offer custody services. However, as is the case with CeFi, there are no on-chain custodial services, nor mature rules like those in the traditional financial industry.
Going forward, it will become necessary for the old and new crypto-financial paradigms to meet so that a liquidity superhighway for DeFi platforms can be developed. This is especially important as this market suffers from a lack of concentrated capital. However, for this to happen, existing players from both centralized and decentralized industries will need to come together and work together with each other.
History should serve as a lesson
There is no doubt that the recent FTX disaster serves as a stark reminder that people should refrain from storing their wealth on non-transparent exchanges. In this regard, Nana Obudadziye Oduwa, the creator of the digital currency Oduwacoin, told that in the future, crypto enthusiasts should realize the absolute importance of keeping their assets in cold storage and hardware wallets, adding:
“There is no doubt that cryptocurrencies are the future of money, and blockchain-based technologies are contributing to redefine transactions, in much the same way that the Internet is in the telecommunications industry. However, people cannot trust their money in the wrong hands, like exchanges, except when they are regulated by evidence of insured funds.”
Quartly-Janeiro believes it is important that there is a certain level of institutional trust and opportunity in the crypto landscape going forward, adding that, as was the case with Lehman Brothers and Barclays in 2008, liquidity can be an issue for any asset class. .
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“While Coinbase and other companies will continue to attract customers, the size of the organization does not in itself protect it from risk,” he said.
Finally, Jarvis argues that over the past few years, the core principles of cryptography have been compromised due to money, market share, and technological feasibility. In his view, this recent wave of insolvency is an ongoing painful episode in the evolution of crypto that is likely for the better as it will set the industry on a better path, i.e. one that is rooted in the spirit of decentralization and transparency. Therefore, as we head into the future driven by decentralized crypto technologies, it will be interesting to see how the market continues to evolve and grow from now on.