Despite the recent implosion of centralized cryptocurrency exchange (CEX) FTX, JPMorgan strategists led by Nikolaos Panigirtzoglou believe that such exchanges will continue to dominate the broader crypto ecosystem as decentralized trading platforms face a number of hurdles.
First, decentralized finance (DeFi) protocols rely heavily on CEXs to function properly and “it will probably be a long time before the center of the price discovery process in the cryptocurrency market shifts from centralized exchanges to DeFi.” “, the team wrote in a recent note to clients. They added that DEXs are not suitable for deep-pocketed investors due to their slower transaction speeds or “their trading strategies and order size to be traceable on the blockchain.”
For DEXs (on-chain), since everything can be traced on the blockchain, it’s almost impossible to mix funds without attracting attention. That is exactly what FTX (off-chain CEX) allegedly did when it was lent half of your clients’ funds to its sister company Alameda Research in an effort to finance risky bets.
While overall trading activity on DEXs appeared to have increased in recent weeks, that early-stage change is more likely a function of deleveraging that followed the FTX crash, the team explained. Bernstein highlighted this trend in a note last week, saying that FTX’s demise is putting cryptographic self-custodywhich allows users to store their own tokens instead of relying on off-chain exchanges, “back in vogue”.
Additionally, DEX trading volumes last month hit the highest level seen since May, rising to $103.84 billion in November from $57.6 billion in October. data from DeFiLlama showed, indicating a decrease in confidence in the CEX. digital galaxy (OTCPK:BRPHF) founder and CEO Mike Novogratz said the FTX mess is a “body shot” to trust in the crypto industry and trust in the system.
But JPMorgan continues to take the opposite view, pointing to DEX’s lack of limit/stop loss functionality, smart contract risk (hacks and protocol attacks), its need for overcollateralization, and pooling of assets into hedge funds. liquidity.
“Risk/return trade-off [is] more difficult to assess in DeFi given the use of different tokens in terms of assets lent or lent/collateral paid/interest payments received and given the general absence of limit/stop loss order functionality,” the note reads.
bitcoin (USD-BTC), the world’s largest digital token by market capitalization, submerged as much as 7.3% in the days after FTX filed for bankruptcy on November 11, though nearly all of those losses were wiped out as of this writing. Overall though, the token was still down 70% since its November 2021 peak. See why Seeking Alpha contributor Vincent Ventures thinks the “FTX’s pain is bitcoin’s gain.”
SA contributor Craig Pirrong weighed in on the DeFi-CeFi debate, saying that the FTX crash does not mean that the centralization of crypto trading is fundamentally flawed, rather it showed the the “worst way” to pursue centralization.