The crypto market is often called the Wild West of the financial world. However, recent events in this space would put even the most hardened cowboys of yesteryear to shame.
As a reminder, on November 8, FTX, the second largest cryptocurrency exchange in the world until about a month ago, faces an unprecedented liquidity crisis after it emerged the company had been facilitate shady business with its related company Alameda Research.
In this regard, while 2022 continues to be challenging for the global economy, the crypto sector, in particular, has been ravaged by a series of meltdowns that have had a major impact on the financial outlook and investor confidence. investors in this maturing industry. At this point, since May, an increasing number of important projects associated with this space, such as Celsius, Three Arrows Capital, Voyager, Vauld and Terra, among others, have collapsed within months.
The fall of FTX in particular was extremely detrimental to the industry, as evidenced by the fact that after the company dissolved, the price of most major crypto assets fell sharply, having shown no signs of recovery. so far. For example, in just 72 hours after development, Bitcoin’s value dropped from $20,000 to around $16,000, with many experts suggesting that the flagship crypto could bottom near $10,000 to $12,000, a history that was mirrored by several other assets.
What lies ahead for cryptocurrency exchanges?
A pertinent question that the recent turmoil has brought to the fore is what the future now holds for digital asset exchanges, especially centralized exchanges (CEX). To gain further insight into the matter, Cointelegraph reached out to Dennis Jarvis, CEO of Bitcoin Exchange and developer of Bitcoin.com cryptocurrency wallet.
In his view, CEXs currently face a formidable uphill battle, especially with low revenues 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 turn to using self-service storage solutions, adding:
“Obviously you cannot trust these centralized intermediaries. There will always be a place for CEXs, but in the long run I think they will play a minority role in the crypto ecosystem; certainly nothing to do with the disproportionate role they have enjoyed so far.
Alex Andryunin, CEO of exchange market maker Gotbit, told Cointelegraph that there is already renewed institutional interest in decentralized exchange (DEX) trading. At this point, he pointed out that just a few months ago (i.e. September), profits for his DEX-centric clients were $8 million, but jumped to $11.8 million over the following months, signaling a 50% increase despite the bloodbath across the set. crypto industry. He added:
“In my view, 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 any major competitors. Even in the US market, Binance US is growing, while Coinbase, Gemini and Crypto.com are falling in DAU, starting in Q3 2022.”
Gracy Chen, managing director of cryptocurrency exchange Bitget, believes that we will now see trading ecosystems enter a consolidation phase, with these platforms under more scrutiny than ever. In his view, this will create an opportunity for exchanges with strong balance sheets and strong risk management practices to consolidate their market share.
“Ultimately, we believe there would be no more than 10 centralized exchanges with strong industry competitiveness,” she told Cointelegraph.
Robert Quartly-Janeiro, chief strategy officer for cryptocurrency exchange Bitrue, shares a similar view. He told Cointelegraph that the collapse of FTX can and should be seen as a historic moment for the industry, which will force exchanges to become more professional and transparent in their day-to-day operations.
“The onus is on exchanges to provide a better experience for crypto investors. They must become better and more reliable places of commerce. Not all will make it, but these true pedigrees will survive. It’s also important to remember that the role of stock exchanges is to protect investors’ funds and provide 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 reasonable balance sheets, there’s no reason they shouldn’t profit from their biting competition. However, Jarvis believes that in the future, these major crypto entities will feel competition from DeFi protocols, especially since many people have now begun to realize the intrinsic problems associated with trusted intermediaries. He added :
“I think you will see a lot more CEX start investing in DeFi versions of their CeFi products. It will be difficult for them, however, as companies have long been building products designed for self-custody and DeFi.
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 loan/debt services, will cease to operate. exist, stating that the CeFi lending model has proven itself to be relatively untrustworthy at this point.
“DeFi will open huge development opportunities. Custody services, transparency and high-level risk management policies will become the norm for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still not practical for retail traders, adding that there are hardly any quality DEXs with features like limit orders today. If that wasn’t enough, he says, most of the platforms operating in this field today offer extremely poor user experience.
“Users need to understand concepts related to metamask and other extensions, with many having difficulty entering fiat/crypto. Even if the average retail trader uses DeFi, they will most likely revert to some CEX with odds of high reserve evidence,” 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 now be key to how customers continue to select exchanges. 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:
“Strong exchanges may be able to increase their grip; however, we will see more and more platforms mixing 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.
Further outlining his perspective on the matter, he added that over the coming months and years, DeFi liquidity will no longer be concentrated on one dominant blockchain and will most likely spread across multiple ecosystems and protocols, as evidenced by the story of this decade. market.
Finally, Chen thinks that in an ideal scenario, CeFi could provide better products with better margins and better leverage, while DeFi could offer trustless custody services. However, as things currently stand in the CeFi zone, there are neither on-chain custody services nor mature regulations like those present in the traditional financial sector.
Going forward, it will become imperative that old and new crypto financial paradigms collide so that a liquidity highway can be designed that DeFi platforms can tap into. This is all the more important as this market suffers from a lack of concentrated capital. However, for this to happen, existing players in both centralized and decentralized industries will need to come together and work collaboratively 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 on exchanges that are not transparent. In this regard, Nana Obudadzie Oduwa, creator of the Oduwacoin digital currency, told Cointelegraph that going forward, it is a must for crypto enthusiasts to realize the absolute importance of storing their assets on cold storage solutions. and hardware wallet, adding:
“There is no doubt that cryptocurrency is the future of money and blockchain-based technologies are helping to redefine transactions the same way the internet has done for the telecommunications industry. However, people cannot trust their money in the hands of other people like exchanges, except when regulated with proof of assured funds.
Quartly-Janeiro believes that going forward, it is important that there is a level of institutional credibility and capacity in 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. .
“While Coinbase and others will continue to attract customers, an entity’s size does not in itself immunize it from risk,” he noted.
Finally, Jarvis claims that over the past few years, the fundamentals of crypto have been compromised due to money, market share, and technological opportunity. In his opinion, this recent wave of insolvency is an ongoing painful episode in the evolution of crypto, one that is likely for the best since it will put the industry on a better path, i.e. say a path rooted in the ethics of decentralization and transparency. Therefore, as we head into a future driven by decentralized crypto technology, it will be interesting to see how the market continues to evolve and grow from now on.