The crypto market is often called the Wild West of the financial world. However, the events that have occurred in this space recently would put even the most hardened of cowboys of yesteryear to shame.
As a quick refresher, on November 8, FTX, the second largest cryptocurrency exchange in the world until about a month ago, faced unprecedented liquidity after it was revealed that the company facilitated shady deals with its related company Alameda. research
In this regard, as 2022 continues to be rough for the global economy, the crypto sector, in particular, has been devastated by a series of meltdowns that have had a significant impact on the financial outlook and investor confidence in relation to this maturing industry. Up to this point, since May, an increasing number of prominent projects associated with this space – such as Celsius, Three Arrows Capital, Voyager, Vauld and Terra, among others – have collapsed within a few months.
The fall of FTX specifically has been extremely damaging to the industry, as evidenced by the fact that after the company’s dissolution, the price of most major crypto-assets has largely declined, showing no signs of recovery so far. For example, within just 72 hours of the development, the value of Bitcoin dropped from $20,000 to around $16,000, with many experts suggesting that the leading crypto may bottom out close to the $10,000-$12,000 range, a story that was mirrored by several others. assets
What’s ahead for crypto exchanges?
One pertinent question that the recent turbulence has brought to the fore is what the future now holds for digital asset exchanges, particularly centralized exchanges (CEXs). To get a better overview of the matter, Cointelegraph reached out to Dennis Jarvis, CEO of Bitcoin exchange and cryptocurrency wallet developer Bitcoin.com.
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In his view, CEXs face a huge uphill battle right now, especially with earnings low and tighter regulation waiting around the corner. In light of the current scenario, he pointed out that more and more people are and will continue to gravitate towards the use of self-storage storage solutions, adding:
“It is obvious that you cannot trust these centralized intermediaries. There will always be a place for CEXs, but in the long run, I believe they will play a minority role in the crypto ecosystem; certainly nothing like the huge role they have enjoyed so far.”
Alex Andryunin, CEO of exchange marketer Gotbit, told Cointelegraph that there is already a large increase in institutional interest in decentralized exchange (DEX). To this point, he emphasized that just a few months ago (ie, September), his clients’ DEX-centric profits stood at $8 million but jumped to $11.8 million in the following months, signaling a 50% increase despite the blood bath throughout. crypto industry. He added:
“In my opinion, the business models of Binance, Coinbase, Kucoin and Kraken will survive the ongoing turbulence. However, even large entities like Coinbase do not currently compete with Binance. The company does not have large competitors. Even within the US market, Binance USA is growing , while Coinbase, Gemini and Crypto.com are falling in DAU, starting in Q3 2022.”
Gracy Chen, managing director for cryptocurrency exchange Bitget, believes that we will now see trading ecosystems enter a consolidation phase, with these platforms being scrutinized more than ever before. In her view, this will create an opportunity for exchanges with strong balance sheets and sound risk management practices to cement their market share.
“Ultimately, we believe there would be no more than 10 centralized exchanges with strong competitiveness in the industry,” she told Cointelegraph.
Robert Quartly-Janeiro, chief strategy officer for cryptocurrency exchange Bitrue, shares a similar perspective. He told Cointelegraph that the collapse of FTX can and should be seen as a historic moment for the industry, one that will force exchanges to become more professional and transparent in their day-to-day operations.
“It’s up to exchanges to provide a better experience to crypto investors. They need to become better and more reliable places to trade. Not all will succeed, but those true pedigrees will survive. It’s also important to remember that the role of exchanges is to protect investors’ funds and to supply a market – not to be the market. FTX got it 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 sane balance sheets, there is no reason for them not to benefit from their competition by biting the dust. However, Jarvis believes that going forward, these major crypto entities will feel the heat of competition from DeFi protocols, especially since many people have now begun to wake up to the internal problems associated with trusted intermediaries. He went on to add:
“I think you’re going to see a lot more CEXs start investing in DeFi versions of their CeFi products. It’s going to be hard for them, though, because companies have been building products designed for self-custodial 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 a large part of all centralized crypto services, especially lending/debt services, will cease to exist, stating that the CeFi lending model has proven. to be relatively unreliable at this point.
“DeFi will introduce enormous development opportunities. Maintenance services, transparency and state-of-the-art risk management policies will become the standard for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still not convenient for retail traders, adding that there are hardly any quality DEXs with features like limit orders today. If that wasn’t enough, in his opinion, most platforms operating in this sphere today offer an extremely weak user experience.
“Users need to understand concepts related to metamask and other extensions, with many experiencing difficulties related to fiat/crypto input. Even if the average retail trader uses DeFi, they will most likely return to some CEX with a high proof-of-reserve rating,” he added.
The future of Crypto lies in 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 from now on. He suggested that pure DeFi will continue to be too difficult to use for most customers while pure CeFi will be too difficult to trust, adding:
“Strong exchanges may be able to increase their stranglehold; however, we will see more and more platforms mixing DeFi and CeFi into CeDeFi, where customers have the same amazing user experience of CeFi, but the transparency of DeFi. This will be the way forward for crypto.”
Elaborating on his views on the matter, he added that in the coming months and years, the liquidity of DeFi will no longer be concentrated on one dominant blockchain and will likely spread across multiple ecosystems and protocols, as is evident throughout the history of this decade-old. market
Ultimately, Chen believes that in an ideal scenario, CeFi could provide better products with better margins and leverage, while DeFi could offer trustless custody services. However, as things stand within the CeFi area, there are neither on-chain custody services nor mature regulations like those present in the traditional financial industry.
Going forward, it will become imperative that the old and new crypto financial paradigms meet in order for a liquidity superhighway to be forged by DeFi platforms. This is particularly important because this market suffers from a lack of concentrated capital. However, for this to happen, existing players from both the 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 keep their wealth in exchanges that are not transparent. In this regard, Nana Obudadzie Oduwa, creator of digital currency Oduwacoin, told Cointelegraph that going forward, it is imperative that crypto enthusiasts are aware of the absolute importance of storing their assets in cold storage and hardware wallet solutions, adding:
“There is no doubt that cryptocurrency is the future of money and blockchain-based technologies are playing their part in redefining transactions, just as the Internet did to the telecommunications industry. However, people cannot trust their money in the hands of other people like exchanges , except when they are regulated with proof of insured funds.”
Quartly-Janeiro believes that moving forward, it is important that there is a level of institutional credibility and capacity within the crypto landscape, adding that much like what happened with Lehman Brothers and Barclays in 2008, liquidity can be a problem in any asset class. .
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“While Coinbase and others will continue to attract customers, the size of an entity does not in itself immunize it from risk,” he noted.
Ultimately, Jarvis claims that over the past years, the core principles of crypto have been compromised for money, market share and technological expediency. In his opinion, this recent wave of insolvency is a continuing painful episode in the evolution of crypto, one that is probably for the best, as it will set the industry on a better path – ie, one that is rooted in the ethos of decentralization and transparency . Therefore, as we move into a future driven by decentralized crypto technology, it will be interesting to see how the market continues to evolve and grow from here.