The FTX debacle turned investors onto decentralized exchanges (DEX), where crypto investors have more control over their coin. And where no cowboy tech CEO can commingle customer funds as FTX did, use it as leverage, and gamble it all away. Moving to decentralized exchanges these last two weeks has been the safe haven crypto move.
Is this a lasting trend?
“Right now, decentralization is on the winning side. People want to be in control of their funds, even many of our clients have asked to withdraw funds from a centralized exchange and switch the market control of their tokens to DEX only,” says Alex Andryunin, CEO of Gotbit. He is based in Lisbon. “After Christmas, everyone will forget about FTX just as they forgot about (Tokyo-based cryptocurrency exchange) Mt. Gox and many other smaller crypto exchange failures and will return to centralization. Decentralization doesn’t have much time to become a habit.”
The move from centralized exchanges (CEX) to decentralized ones has been forecast as recently as May. Every time Coinbase has a nasty trading session, the rise of the DEX is often given as the reason.
In recent pro-DEX headlines, that famous Dutch family of five, known as The Bitcoin Family, who supposedly went all-in on bitcoin and moved to Thailand, said they rely mostly on decentralized exchanges, Didi Taihuttu, the father of three, told CNBC on Dec. 1.
In short, a decentralized exchange does not store crypto unless the investor is using it for “staking” (think of it as dividend yield). Other than that, an investor needs a hard wallet – which looks like a large UBS drive – to download their holdings. Safety is important following disasters like cybersecurity theft or what appears more like corporate theft in the case of FTX.
But the latest window of opportunity for the DEX won’t stay wide open for long. Investors accustomed to E*Trade-like trading platforms lost a lot of that in moving to a DEX.
Decentralized Exchanges: Not Quite Ready for the ‘Big Time’
As a cryptocurrency investment, investing in the tokens of decentralized exchanges is a good way to diversify a digital asset portfolio.
“Uniswap is the classic DEX” says Andryunin. “I think GMX is the best perpetual DEX, and HyperSea is a top up-and-coming liquidity management DEX.”
GMX is up 23% in the last four weeks and 85% in the last year.
For investors, the CEX trade is like putting your stock and bond holdings in the hands of Charles Schwab. It’s a household name. A DEX trade is putting trust in a company that probably does not advertise on CNBC or have its name up in lights in Times Square.
Decentralized exchanges get a lot of attention when centralized exchanges go bust, but they do not yet compare with their more liquid, well-capitalized peers.
“Decentralized exchanges are not ready for high-frequency trading, or algorithmic trading,” says Pavlov Oleksii, founder of Web 3 software firm K1 Core and EU-based financial platform, Kauri.Finance.
“The DEX still has problems with the depth of the order book and execution speed. And in many (coin trading) pairs, there are no market makers who can fill an order book,” he says. K1 is working on software solutions to these problems to “take the best from DEX and CEX” to build a liquidity aggregator that will fill an order book from popular DEX and CEX exchanges.
To many founders in the exchange space today, the goal is to “take the best from DEX, and this is the storage method, and the best from CEX, which is the speed of operation and the depth of liquidity,” says Olekskii. “Combining the best tools in one product will lead to a breakthrough.”
Andryunin says another big problem is the DEX user and trading interface.
“One of the new platforms GMX came out with has a more or less decent interface, and it immediately gained popularity,” he says. “If DEXs start working on the interface, especially mobile, we will see a significant flow of liquidity and volumes to such convenient DEXs.
Gotbit uses a cross-chain DEX. Users can trade on any network.
“At this moment, many of the best user experiences exist where centralization and decentralization co-exist,” says Sean Rach, former CMO of Crypto.com and now co-founder of hi, a tech start-up behind a mobile app for all-in-one banking services like savings, investments, and payments in crypto and traditional money. The company recently launched a multi-currency debit card with Mastercard
“If you are going to provide convenient, fast, global experiences (for investors and users), then decentralization and centralization must co-exist,” says Rach. “You have to provide investors the freedom to choose how they want to engage with the platform. We call this ‘progressive decentralization’,” he says.
DEX: To the Moon
Rach says for DEXs to go mainstream, they need to improve the fiat on/off-ramp experience, which requires a connection to traditional banking institutions; give users freedom to choose between decentralized finance (DeFi) and centralized finance (CeFi), such as the creation of a DeFi and CeFi wallet in a single app; and make it multi-chain, so users don’t need to use multiple platforms for different needs.
It’s very complicated. Like picking a new stock, investors in this space will benefit if they buy the right tokens of tech companies that manage to pull this off. Little is known about them. They’re not talked about in the traditional financial press. The “bitcoin press” will focus on the tech, which is an important differential but is hard for the lay investor to understand.
For this reason, DEXes have a long way to go to win over retail investor accounts. Coinbase might look like child’s play to crypto pros, but it’s the leading exchange by volume in the U.S. Some consider the non-custodial Coinbase wallet to be one of the safest in the world.
“Polarized views between centralization and decentralization exist on a philosophical level for most retail investors,” says Rach. “Many of us, myself included, can wax lyrical about decentralized values around the dinner table and then happily plow our hard-earned cash into Binance, FTX or Coinbase. Why? Because moving dollars into decentralized finance is not simple. Because buying and selling crypto with decentralized (exchanges) is not simple. Because converting crypto profits into cash you can spend in the real world is not simple.”
The FTX blowout has shaken investors’ confidence in cryptocurrency. It has again brought to the fore the wisdom of holding investment capital on a loosely regulated exchange.
“We are in another crypto winter, but it’s not the crypto apocalypse,” says Olekskii. As for the future of the DEX: “Just as cryptocurrencies cannot be a substitute for fiat, a DEX cannot be a substitute for a CEX. Ultimately, we must take the best from each technology.”
*The writer owns bitcoin on centralized exchanges.
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