The crypto market is often referred to as the Wild West of the financial world. However, the events that have played out in this space of late would put even the most hardened cowboys of old to shame.
As a refresher, on November 8, FTX, the world’s second-largest cryptocurrency exchange until about a month ago, faced an unprecedented liquidity crisis after it came to light that the company had 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 ravaged by a series of slumps that have had a major impact on the financial outlook and investor confidence in this maturing industry. So far since May, a growing number of prominent projects associated with this space — such as Celsius, Three Arrows Capital, Voyager, Vauld, and Terra, among others — have collapsed within months.
In particular, the demise of FTX has been extremely damaging to the industry, as evidenced by the fact that following the company’s dissolution, the price of most of the major crypto-assets plummeted, showing no signs of recovery until now. For example, within just 72 hours of development, Bitcoin’s value plummeted from $20,000 to around $16,000, with many experts suggesting that the flagship crypto could hit a low near the $10,000 – $12,000 range, a story that has been reflected by various other means.
What’s in store for cryptocurrency exchanges?
A pertinent question that the recent turbulence has brought to the fore is what the future holds for digital asset exchanges, especially centralized exchanges (CEXs). To get a better overview of the matter, TSTIME reached out to Dennis Jarvis, CEO of Bitcoin Exchange and cryptocurrency wallet developer Bitcoin.com.
Recent: Bitcoin miners are looking at software to balance the Texas grid
He says CEXs are facing a huge uphill battle right now, especially with revenues low and tighter regulation looming. In light of the current scenario, he pointed out that more and more people are and will continue to be drawn to using self-serving storage solutions, adding:
“It is clear 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 beats the outsize role they’ve played so far.
Alex Andryunin, CEO of exchange market maker Gotbit, told TSTIME that there is already a major wave of institutional interest in decentralized exchange (DEX) trading. To this point, he emphasized that just a few months ago (i.e. September), his clients’ DEX-centric profits were $8 million, but jumped to $11.8 million in subsequent months, signaling a 50% increase. % despite the carnage across the entire 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 are not currently competing with Binance. The company no longer has major competitors. Even within the US market, Binance US is growing, while Coinbase, Gemini, and Crypto.com are dropping in DAU from Q3 2022.”
Gracy Chen, director of cryptocurrency exchange Bitget, believes that we will now see trading ecosystems enter a consolidation phase, with these platforms coming under more scrutiny than ever before. She believes this will create an opportunity for exchanges with strong balance sheets and sound risk management practices to bolster their market share.
“Ultimately, we believe there will be no more than 10 centralized exchanges with strong competitiveness in the industry,” she told TSTIME.
Robert Quartly-Janeiro, chief strategy officer for cryptocurrency exchange Bitrue, shares a similar view. He told TSTIME 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 is the job of exchanges to provide a better experience for crypto investors. They must become better and more reliable trading places. Not everyone will make it, but those real pedigrees will survive. It is also important to remember that the role of exchanges is to protect investors’ funds and provide a market – not to be the market. FTX got that 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 sensible balances, there is no reason for them not to take advantage of their competition biting the dust. However, Jarvis believes that these major crypto entities will feel competition from DeFi protocols in the future, especially as many people are now starting to wake up to the inherent issues associated with trusted intermediaries. He added:
“I think you’ll see a lot more CEXs start investing in DeFi versions of their CeFi products. However, it will be hard for them because companies have been building products designed for self-preservation and DeFi for a long time.
Similarly, Chen believes there will be new opportunities for decentralized finance (DeFi) in the near term, adding that a large portion of all centralized crypto services, especially lending/debt services, will cease to exist, stating that the CeFi lending model has proven currently relatively unreliable.
“DeFi will usher in huge development opportunities. Custody services, transparency and high-quality risk management policies will become the norm for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still not convenient for retailers, adding that there are hardly any quality DEXs with features like limit orders these days. As if that wasn’t enough, most of the platforms operating within this domain today offer an extremely weak user experience, he says.
“Users need to understand concepts related to metamask and other extensions, with many experiencing issues related to fiat/crypto entry. Even if the average retailer uses DeFi, they will most likely return to a 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 select exchanges from now on. He suggested that pure DeFi will continue to be too difficult for most customers to use, while pure CeFi will be too difficult to trust, adding:
“Solid exchanges can increase their stranglehold; however, we will see more and more platforms combining DeFi and CeFi into CeDeFi, where customers have the same great user experience of CeFi, but the transparency of DeFi. This will be the way forward for crypto.”
He further elaborated his views, adding that DeFi liquidity will no longer be concentrated on one dominant blockchain in the coming months and years and will likely spread across multiple ecosystems and protocols, as evidenced by the history of this decade-old market.
Finally, Chen believes that in an ideal scenario, CeFi could offer better products with better margins and leverage, while DeFi could offer reliable custody services. However, as things stand within the CeFi realm, there are no on-chain custody services or mature regulations as present in the traditional financial sector.
Going forward, it will become imperative that the old and new financial paradigms for crypto come together so that a liquidity superhighway can be devised for DeFi platforms to draw from. This is especially important as 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 with each other.
History should serve as a lesson
There is no doubt that the recent FTX disaster is a stark reminder that people should refrain from storing their wealth in exchanges that lack transparency. In this regard, Nana Obudadzie Oduwa, creator of digital currency Oduwacoin, told TSTIME that it is a must for crypto enthusiasts to realize the importance of storing their assets in cold storage and hardware wallet solutions, adding:
“There is no question that cryptocurrency is the future of money and blockchain-based technologies are helping to redefine transactions much in the same way the internet did to the telecommunications industry. However, people cannot trust their money into other people’s hands, such as exchanges, except when they are regulated with proof of insured funds.
Quartly-Janeiro believes it is important that there is a level of institutional credibility and competence within the crypto landscape, adding that, like what happened with Lehman Brothers and Barclays in 2008, liquidity can be an issue in any asset class. .
Recent: House on a Hill: Top countries to buy real estate with crypto
“While Coinbase and others will continue to attract customers, the size of an entity in itself is not immune to risk,” he noted.
Finally, Jarvis claims that the core principles of crypto have been compromised in recent years due to money, market share, and technological expediency. In his view, this recent wave of insolvency is an ongoing painful episode in crypto’s evolution, one that is probably for the best because it will set the industry on a better path — that is, one that is rooted in the ethos of decentralization and transparency. . Therefore, as we move into a future powered by decentralized crypto technology, it will be interesting to see how the market continues to evolve and grow from now on.