The crypto market is often referred to as the Wild West of the finance world. However, the events that have unfolded within this space recently would put to shame even the hardiest of cowboys from the day of yore.
As a quick refresher, on Nov. 8, FTX, the second-largest cryptocurrency exchange in the world till about a month ago, faced an unprecedented liquidity crunch after it came to light that the firm had been facilitating shady deals with its related firm Alameda Research.
In this regard, as 2022 continues to be rough on the global economy, the crypto sector, in particular, has been ravaged by a series of meltdowns that have had a major impact on the financial outlook and investor confidence in relation to this maturing 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 — have collapsed within a matter of months.
FTX’s downfall specifically has been extremely damaging for the industry, as evidenced by the fact that following the company’s dissolution, the price of most major crypto assets dipped majorly, having shown no signs of recovery thus far. For example, within just 72 hours of the development, the value of Bitcoin plummeted from $20,000 to approximately $16,000, with many experts suggesting that the flagship crypto may bottom out close to the $10,000–$12,000 range, a story that has been mirrored by several other assets.
What lies ahead for cryptocurrency exchanges?
One pertinent question that the recent turbulence has brought to the forefront is what the future now holds for digital asset exchanges, especially centralized exchanges (CEXs). To get a better overview of the matter, Cointelegraph reached out to Dennis Jarvis, CEO of Bitcoin exchange and cryptocurrency wallet developer Bitcoin.com.
In his view, CEXs are being faced with a tremendous uphill battle right now, especially with revenues being low and stricter regulation waiting around the corner. In light of the current scenario, he pointed out that more and more people are and will continue to gravitate toward the use of self-custodial storage solutions, adding:
“It’s obvious you can’t trust these centralized intermediaries. There will always be a place for CEXs, but over the long term, I believe they will play a minority role in the crypto ecosystem; certainly nothing like the outsized role they’ve enjoyed up to now.”
Alex Andryunin, CEO of exchange market maker Gotbit, told Cointelegraph that there is already a major surge of institutional interest in decentralized exchange (DEX) trading. To this point, he highlighted that just a couple of months ago (i.e., September), his clients’ DEX-centric profits lay at $8 million but jumped to $11.8 million in subsequent months, signaling a 50% rise despite the bloodbath across the entire crypto industry. He added:
“In my opinion, Binance, Coinbase, Kucoin and Kraken’s business models will survive the ongoing turbulence. However, even large entities like Coinbase are not currently competing with Binance. The company has no big competitors left. Even inside the U.S. market, Binance US is growing, while Coinbase, Gemini and Crypto.com are falling in DAU, as of Q3 2022.”
Gracy Chen, managing director for cryptocurrency exchange Bitget, believes that we will now see trading ecosystems enter a consolidation phase, with these platforms being scrutinized more than ever before. In her view, this will create an opportunity for exchanges with strong balance sheets and solid risk management practices to cement their market share.
“Ultimately, we believe there would 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 viewed as a historic moment for the industry, one that will force exchanges to become more professional and transparent in their day-to-day operations.
“It’s incumbent on exchanges to provide a better experience to crypto investors. They must become better and more trustworthy places to trade. Not all will make it, but those real 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 the market. FTX got that wrong,” he added.
Can DEXs fill the void?
While most experts believe that as long as centralized exchanges like Binance and Coinbase continue to maintain sensible balance sheets, there’s no reason for them not to benefit from their competition biting the dust. However, Jarvis believes that moving forward, these major crypto entities will feel the heat of competition from DeFi protocols, especially since many people have now started to wake up to the intrinsic problems associated with trusted intermediaries. He went on to add:
“I think you’ll see a lot more CEXs begin to invest in DeFi versions of their CeFi products. It will be tough for them, though, because companies have been building products designed for self-custody and DeFi for a long time.”
Similarly, Chen believes there will be new opportunities for decentralized finance (DeFi) in the near term, adding that a large portion of all centralized crypto services, especially lending/debt services, will cease to exist, stating that the CeFi lending model has proven to be…
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