The crypto market is often referred to as the wild west of finance. However, the recent events that have unfolded in this room would put even the toughest cowboys of yore to shame.
For a quick refresher, on Nov. 8, FTX, the world’s second-largest cryptocurrency exchange until about a month ago, faced an unprecedented liquidity squeeze after it was revealed that the firm had facilitated shady deals with its affiliate Alameda Research.
As 2022 continues to be a tough one for the global economy, the crypto sector in particular has been hit with a series of meltdowns that have heavily impacted the financial outlook and investor confidence in this maturing industry. Since May, a growing number of prominent projects related to this space – including Celsius, Three Arrows Capital, Voyager, Vauld, and Terra – have collapsed in a matter of months.
In particular, the demise of FTX was extremely detrimental to the industry, as evidenced by the fact that following the company’s dissolution, the prices of most major crypto assets fell sharply as they have so far shown no signs of recovery. For example, Bitcoin’s value plummeted from $20,000 to around $16,000 within just 72 hours of developing, with many experts suggesting that the crypto’s flagship could bottom near the $10,000 to $12,000 range, a story that was reflected by several other assets.
What’s next for cryptocurrency exchanges?
A relevant question that the recent turmoil has brought to the fore is what the future holds for digital asset exchanges now, particularly for centralized exchanges (CEXs). To get a better handle on 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, the CEXs are facing an enormous uphill battle right now, especially given the low revenues and tighter regulation ahead. Given the current scenario, he pointed out that more and more people will be interested and will continue to choose to use self-decustod storage solutions, adding:
“It is obvious that these centralized intermediaries cannot be trusted. There will always be a place for CEXs, but I believe they will play a minor role in the crypto ecosystem in the long run; certainly nothing like the outsized role they’ve enjoyed to date.”
Alex Andryunin, CEO of exchange market maker Gotbit, told Cointelegraph that there is already a big surge in institutional interest in decentralized exchange trading (DEX). Up to this point, he emphasized that his clients’ DEX-centric profits were at $8 million a few months ago (i.e. in September), but have increased to $11.8 million in subsequent months, despite the bloodbath Crypto industry signaled a 50% increase across the company. He added:
“In my opinion, the business models of Binance, Coinbase, Kucoin and Kraken will weather the ongoing turmoil. But even large companies 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 fall in DAU as of Q3 2022.”
Gracy Chen, chief executive of cryptocurrency exchange Bitget, believes that trading ecosystems will now enter a period of consolidation, with these platforms coming under more scrutiny than ever. They believe this will create an opportunity for exchanges with strong balance sheets and sound risk management practices to solidify their market share.
“Ultimately, we believe there will be no more than 10 centralized exchanges with strong industry competitiveness,” she told Cointelegraph.
Robert Quartly-Janeiro, chief strategy officer at 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 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 for crypto investors. They must become better and more trusted places to trade. Not all will make it, but these real family trees will survive. It’s 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 it wrong,” he added.
Can DEXs fill the gap?
While most experts believe that as long as centralized exchanges like Binance and Coinbase continue to maintain healthy balance sheets, there’s no reason for them not to take advantage of their competition’s biting the dust. However, Jarvis believes that going forward, these major crypto entities will feel the heat of competition from DeFi protocols, especially as many people have now begun to see the intrinsic issues surrounding trusted intermediaries. He added:
“I think you will see many more CEXs start investing in DeFi versions of their CeFi products. However, it will be difficult for them because companies have a long history of developing products designed for self-custody and DeFi.”
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 credit/debt services, will no longer exist, stating that the CeFi credit model has proven to be relatively unreliable at this point.
“DeFi will open up tremendous development opportunities. Custodial services, transparency and best-in-class risk management policies are becoming the norm for centralized services,” she said.
However, Andryunin noted that most DeFi protocols are still not convenient for retail traders, adding that today there are hardly any high-quality DEXs with features like limit orders. As if that wasn’t enough, in his view, most of the platforms operating in this space today offer an extremely poor user experience.
“Users need to understand concepts related to metamasks and other extensions, with many struggling with fiat/crypto inputs. 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 choose exchanges going forward. 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 could tighten their stranglehold; However, we will see more and more platforms mixing DeFi and CeFi into CeDeFi, where customers have the same awesome user experience of CeFi but the transparency of DeFi. This will be the way forward for crypto.”
He further clarified his views on the matter, adding that in the coming months and years, DeFi liquidity will no longer be centered on one dominant blockchain and will very likely spread across multiple ecosystems and protocols, as has been the history of this decade has shown market.
Finally, Chen believes that in an ideal scenario, CeFi could offer better products with better margins and leverage, while DeFi could offer trusted custody services. However, as of today, the CeFi space lacks on-chain custody services and mature regulations like those found 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 developed for DeFi platforms to tap into. This is particularly important as this market suffers from a lack of concentrated capital. However, this requires existing players from both centralized and decentralized industries to come together and work together.
The story 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 opaque exchanges. In that regard, Nana Obudadzie Oduwa, creator of digital currency Oduwacoin, told Cointelegraph that it is a must for crypto enthusiasts to realize the importance of storing their assets in cold storage and hardware wallet solutions, and added:
“There is no doubt that cryptocurrencies are the future of money, and blockchain-based technologies are doing their bit to redefine transactions, much like the internet did in the telecom industry. However, people cannot trust their money in the hands of other people like stock exchanges, unless regulated by proof of insured funds.”
Quartly-Janeiro believes it’s important that there is some level of institutional credibility and capability in the crypto landscape, adding that, much like Lehman Brothers and Barclays in 2008, liquidity is an issue in every asset class can be .
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“While Coinbase and others will continue to attract customers, a company’s size alone does not protect against risk,” he noted.
Finally, Jarvis claims that the fundamental principles of crypto have been compromised in recent years due to money, market share, and technological expediency. In his opinion, this recent spate of bankruptcies is an ongoing painful episode in crypto’s development, one that is probably for the best as it will set the industry on a better path – i.e. one rooted in the ethos of decentralization and transparency. As such, it will be interesting to see how the market continues to evolve and grow from now on as we move towards a future powered by decentralized crypto technology.