The crypto market is often referred to as the Wild West of the financial world. However, the events that have recently taken place in this area would put even the toughest cowboys of old to shame.
For a quick refresher, on November 8th, FTX, the second largest cryptocurrency exchange in the world, until about a month ago, faced an unprecedented liquidity crisis after it was revealed that the firm was facilitating shady deals with its sister company Alameda Research.
In this regard, 2022 continues to be a rough year for the global economy, the crypto sector in particular has been ravaged by a series of crashes that have had a major impact on the financial outlook and investor confidence in this mature industry. To this point, since May, a growing number of prominent projects associated with this space, such as Celsius, Three Arrows Capital, Voyager, Vauld and Terra, among others collapsed within months.
The fall of FTX was extremely damaging to the industry, as evidenced by the fact that after the company’s dissolution, the price of most major cryptoassets dropped significantly and have yet to show any signs of recovery. For example, within just 72 hours of its development, Bitcoin fell from $20,000 to around $16,000, with many experts suggesting that the flagship cryptocurrency may bottom out near the $10,000-$12,000 range, a story that has been mirrored by several other assets.
What’s in store for cryptocurrency exchanges?
One relevant question that the recent turbulence has brought to the fore is what the future holds now for digital asset exchanges, particularly centralized exchanges (CEX). To gain more insight into the matter, Cointelegraph reached out to Dennis Jarvis, CEO of Bitcoin exchange and cryptocurrency wallet developer Bitcoin.com.
In his view, CEX is facing a tremendous uphill battle right now, especially with low yields and tighter regulation around the corner. In light of the current scenario, he pointed out that more and more people are and will continue to gravitate towards using self-binding data storage solutions, adding:
“Obviously you can’t 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 great role they have enjoyed until now.’
Alex Andryunin, CEO of exchange market maker Gotbit, told Cointelegraph that there is already a large increase in institutional interest in decentralized exchange (DEX) trading. To this point, he pointed out that just a few months ago (i.e. September) his DEX-focused clients’ profits were at $8 million, but in the following months they jumped to $11.8 million, signaling a 50% increase despite the bloodbath throughout crypto industry. Added by:
“In my opinion, the business models of Binance, Coinbase, Kucoin and Kraken will survive the continued turbulence. However, even large entities like Coinbase do not currently compete with Binance. The company has no major competitors. Even in the US market, Binance US is growing, while Coinbase, Gemini and Crypto.com are declining in DAU from Q3 2022.”
Gracy Chen, CEO of cryptocurrency exchange Bitget, believes that we will now see trading ecosystems enter a phase of consolidation, with these platforms subject to more scrutiny than ever before. In her view, this will create an opportunity for exchanges with strong balance sheets and solid risk management practices to consolidate their market share.
“Ultimately, we believe there will 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 outlook. He told Cointelegraph that the collapse of FTX can and should be seen as a historic moment for the industry, forcing exchanges to become more professional and transparent in their day-to-day operations.
“Exchanges have an obligation to provide a better experience for cryptocurrency investors. They need to become better and more trusted places to do business. Not all will make it, but the true pedigrees will survive. It’s also important to remember that the role of exchanges is to protect investors’ funds and provide a market – not be a 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 maintain reasonable balance sheets, there is no reason for them not to benefit from their competition biting the dust. However, Jarvis believes that in the future, 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 further added:
“I think you will see a lot more CEXs start investing in DeFi versions of their CeFi products. It will be difficult for them because companies have been making self-management and DeFi products for a long time.”
Similarly, Chen believes that new opportunities for decentralized finance (DeFi) will arise in the near future, adding that a large part of all centralized crypto services, especially credit/debt services, will cease to exist, stating that the CeFi lending model has proven to be in this relatively untrustworthy for a while.
“DeFi will bring enormous development opportunities. Custodial services, transparency and risk management policies at the highest level will become the norm for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still not suitable for retailers, adding that today there are almost no quality DEXs with features such as limit orders. If that wasn’t enough, in his opinion, most of the platforms operating in this area today offer an extremely poor user experience.
“Users need to understand the concepts related to metamask and other extensions, while many of them struggle with fiat/crypto input. Even if the average retailer uses DeFi, they will most likely go back to some CEX with a high proof-of-reserve rating,” he added.
The future of cryptocurrencies lies in the marriage of CeFi and DeFi
According to Julian Hosp, founder of decentralized exchange DefiChain, transparency will be key to how customers will continue to choose 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:
“Solid 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 fantastic user experience of CeFi, but the transparency of DeFi. This will be the way forward for cryptocurrencies.”
He further elaborated on his views on the matter, adding that in the coming months and years, DeFi liquidity will no longer be concentrated on one dominant blockchain and will quite likely spread to multiple ecosystems and protocols, as evidenced by the history of this decade. market.
Ultimately, Chen believes that in an ideal scenario, CeFi could provide better products with better margins and leverage, while DeFi could offer trusted escrow services. However, as things stand in CeFi, there are neither on-chain escrow services nor the sophisticated regulations that exist in the traditional financial industry.
In the future, it will become necessary for the old and new crypto financial paradigms to meet in order to invent a liquidity superhighway for DeFi platforms to tap into. This is particularly 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 cooperate 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 in exchanges that are not transparent. In this regard, Nana Obudazie Oduwa, the creator of the Oduwacoin digital currency, told Cointelegraph that going forward, it is imperative that cryptocurrency enthusiasts realize the absolute importance of storing their assets in cold storage and hardware wallets, adding:
“There is no doubt that cryptocurrency is the future of money, and blockchain-based technologies are playing their part in redefining transactions, much like the Internet did in the telecommunications industry. But people cannot trust their money in the hands of strangers, such as money-changers, except when they are regulated by proof of insured funds.’
Quartly-Janeiro believes that going forward it is important for there to be some level of institutional credibility and capability in cryptocurrency, adding that similar to what happened with Lehman Brothers and Barclays in 2008, liquidity can be an issue in any asset class . .
“While Coinbase and others will continue to attract customers, the size of the entity alone will not insulate it from risk,” he noted.
Finally, Jarvis argues that over the past few years, the fundamental principles of cryptocurrencies have been compromised for the sake of money, market share and technological expediency. In his view, this recent wave of insolvencies is a continuing painful episode in the evolution of cryptocurrency, which is probably for the best, as it sets the industry on a better path — one that is rooted in an ethos of decentralization and transparency. Therefore, as we head into a future powered by decentralized crypto-technology, it will be interesting to see how the market continues to evolve and grow.