Cryptoverse: Let’s talk about DEX, baby


Nov 22 (Reuters) – As the crypto castle crumbles, some true believers say the answer is to double down on DEX usage. Decentralized exchanges, that is.

The spectacular collapse of Sam Bankman-Fried’s FTX, a major centralized crypto exchange, has sparked a wave of calls for more regulation from major bankers and investors.

Rather, some crypto players are channeling bitcoin creator Satoshi Nakamoto’s original crypto vision by cutting out the financial middleman and turning to decentralized exchanges, where investors trade peer-to-peer on the blockchain.

On November 10, as FTX implodedOverall daily trade volumes on DEXs, including those on Uniswap, rose as much as $12 billion, their highest level since May, according to data from DeFi market tracker Llama, though they have since pared gains.

Four days later, volumes for November had surpassed the entire previous month, according to CryptoCompare.

Meanwhile, weekly bitcoin flows from centralized exchanges, or CEXs, posted their largest net outflow ever, with 97,805 coins moved off the platforms in the seven days to Nov. 13, data shows. CryptoCompare data.

“It is now clear that there may be a risk associated with holding assets in a centralized entity,” said Varun Kumar, chief executive of decentralized crypto exchange Hashflow. “The data shows that users are turning to decentralized business solutions.”

However, DEXs are not necessarily more secure than their centralized rivals, and inexperienced investors are potentially exposed to great risk.

Users exchange tokens directly with each other using blockchain-based smart contracts instead of passing funds through an intermediary or central authority.

Therefore, as with other platforms in the world of decentralized finance (DeFi) or Web3, there is no central oversight and, for better or worse, investors are responsible for their operations, settlements and custody of coins or tokens.

Compared to CEX, like Coinbase (COIN.O)Binance and FTX, are more akin to traditional exchanges on Wall Street, acting as intermediaries in transactions, making trading easier to use, especially for new investors, and sometimes offering coin custody services, like FTX did.

Many centralized players have also been pushing to increase user trust with measures to increase transparency, such as showing proof of their reservations.

Coinbase, Binance and FTX did not immediately respond to requests for comment.

Reuters charts

FTX SHENANIGANS

That said, decentralization advocates say that DEXs could offer investors some protection against the kind of shenanigans that appear to have occurred at FTX, where as much as $1 billion in client funds are reportedly missing.

DEXs cannot stop withdrawals, require users to retain custody of their funds, and trading activity and reserves can be tracked directly on the blockchain.

“There are definitely elements of DEXs that appeal to people as they mitigate the chances of some nefarious trader or single point of failure in the system,” said David Wells, CEO of crypto exchange Enclave Markets, which offers elements of services. centralized and decentralized. .

The FTX crash certainly increased trading volumes on decentralized exchanges at the time.

Volumes on the largest DEX, Uniswap, increased to $17.2 billion in the week of November 6-13, from just over $6 billion the week before, while other smaller decentralized exchanges also reported volumes. Taller.

GMX saw more than $6 billion in the week after November 6, when FTX’s problems came to light, three times more recent than their weekly averages. Hashflow saw $110 million in November 9the day Binance abandoned a plan to bail out FTX, down from a daily average of $25 million.

Despite the recent surge, cryptocurrencies are not migrating en masse to DeFi exchanges, and daily DEX volumes have pulled back close to October levels below $3 billion.

Nonetheless, there has been a broader and more subtle shift towards decentralized exchanges, with data from Chainalysis showing that overall monthly trade volumes on DEXs ranged from $181.5 billion to $240.3 billion from August to October. , compared to a range of $173 billion to $203.5 billion for CEX.

LOWER TRADE SPEEDS

The renewed interest in DEXs ties into the debate at the heart of cryptocurrency since Satoshi Nakamoto’s bitcoin white paper 14 years ago: the role, if any, that centralization and regulation should play in the ecosystem. of cryptocurrencies.

While some investors prefer the transparency of decentralized exchanges, the platforms are not suitable for investors like traditional financial institutions and specialized trading firms, Wells said at Enclave Markets.

For example, DEXs typically have slower transaction speeds, while hedge funds may not want their trading strategies to be publicly traceable on the blockchain.

Many traditional financial institutions are also legally required to hold external funds with a third-party custodian and would not be able to “self-custody” investor assets for trading on decentralized exchanges.

So is the future DEX or CEX?

Many market participants see the coexistence of centralized and decentralized exchanges.

“Interconnection is critical,” said Chris Kline, co-founder of the Bitcoin IRA, which offers cryptocurrency retirement accounts, referring to DEXs and CEXs growing together as cryptocurrency trading expands.

“Both will exist in the future.”

Reporting by Lisa Pauline Mattackal and Medha Singh in Bangalore; Edited by Vidya Ranganathan and Pravin Char

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