FTX’s collapse could change governance standards for the crypto industry for good

FTX’s collapse could change governance standards for the crypto industry for good

The crypto market is often referred to as the wild west in the financial world. However, the recent events that have unfolded in this room would put even the most hardened cowboys of yesteryear to shame.

As a quick refresher, on November 8, FTX, the second largest cryptocurrency exchange in the world until a month ago, faced an unprecedented liquidity crisis after it emerged that the firm had facilitated shady deals with related firm Alameda. Investigations.

In this regard, as 2022 continues to be tough for the global economy, the crypto sector in particular has been ravaged by a series of meltdowns that have had a major impact on the economic outlook and investor confidence in this maturing industry. To this point, since May, an increasing number of prominent projects related to this space – such as Celsius, Three Arrows Capital, Voyager, Vauld and Terra, among others – have collapsed within a few months.

FTX’s fall has specifically been extremely damaging to the industry, as evidenced by the fact that following the company’s dissolution, the price of most major cryptoassets fell significantly, having shown no signs of recovery so far. For example, within just 72 hours of its development, the value of Bitcoin fell from $20,000 to roughly $16,000, with many experts suggesting that the flagship crypto could bottom out near $10,000-$12,000, a story that has been mirrored by several others. assets.

What’s in store for cryptocurrency exchanges?

A relevant question that the recent turbulence has brought to the fore is what the future holds for digital asset exchanges, particularly centralized exchanges (CEX). To get a better overview of 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, CEXs are facing a huge uphill battle right now, especially with low earnings and tighter regulations looming around the corner. In light of the current scenario, he pointed out that more and more people are and will continue to gravitate towards the use of self-storage solutions, adding:

“It is obvious that you cannot trust these centralized intermediaries. There will always be a place for CEXs, but in the long term I think they will play a minority role in the crypto ecosystem; certainly nothing like the outsized role they have had up until now.”

Alex Andryunin, CEO of exchange producer Gotbit, told Cointelegraph that there is already a large increase of institutional interest in decentralized exchange trading (DEX). To this point, he highlighted that just a couple of months ago (i.e. September) clients’ DEX-centric profits were at $8 million, but jumped to $11.8 million in the following months, signaling a 50% increase despite for the carnage across the 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 do not compete with Binance. The company has no major competitors left. Even inside the US market, Binance US is growing, while Coinbase, Gemini and Crypto.com will drop in DAU starting in Q3 2022.

Gracy Chen, CEO of 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 shares.

“Ultimately, we believe there will be no more than 10 centralized exchanges with strong competitiveness in the industry,” she told Cointelegraph.

Robert Quartly-Janeiro, chief strategy officer of 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, one that will force exchanges to become more professional and transparent in their day-to-day operations.

“The onus is on exchanges to provide a better experience for crypto investors. They need to become better and more reliable places to trade. Not all will make it, but the real pedigrees will survive. It’s also important to remember that the role of the exchange is to protect investors’ funds and provide a market – not be the market.FTX got it 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 sane balance sheets, there’s no reason why they shouldn’t benefit from their competitors biting the dust. However, Jarvis believes that going forward, these major crypto entities will feel the heat of competition from DeFi protocols, especially since many people have now begun to wake up to the inherent problems associated with trusted intermediaries. He went on to add:

“I think you will see a lot more CEXs start investing in DeFi versions of their CeFi products. It will be tough for them, though, because companies have been building products designed for self-storage and DeFi for a long time.”

Similarly, Chen believes that there will be new opportunities for decentralized finance (DeFi) in the near term, adding that a large part of all centralized crypto services, especially lending/debt services, will cease to exist, saying that the CeFi lending model has proved to be relatively unreliable at this time.

“DeFi will usher in huge development opportunities. Custody services, transparency and top-shelf risk management policies will become the norm for centralized services,” she said.

However, Andryunin noted that most DeFi protocols are still not practical for retail traders, adding that there are hardly any quality DEXs with features such as limit orders today. If that wasn’t enough, in his view, most platforms operating within this realm today offer an extremely weak user experience.

“Users need to understand concepts related to metamask and other extensions, with many experiencing difficulties related to fiat/crypto inputs. Even if the average retail user uses DeFi, they will most likely go back to some CEX with a high proof-of-reserve rating, he added.

Crypto’s future 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 to use for most customers, while pure CeFi will be too difficult to trust, adding:

“Solid exchange may be able to increase their stranglehold; however, we will see more and more platforms that blend DeFi and CeFi into CeDeFi, where customers have the same amazing user experience of CeFi, but the transparency of DeFi. This will be the way forward for crypto.”

He further explained his views on the matter, adding that in the coming months and years, DeFi liquidity will no longer be concentrated on one dominant blockchain and will quite likely spread across multiple ecosystems and protocols, as shown throughout the history of this decades old market.

Finally, Chen believes that in an ideal scenario, CeFi can offer better products with better margins and leverage, while DeFi can offer trustless custody services. But as things stand within the CeFi area, there are neither chain custody services nor mature regulations like those present in the traditional financial industry.

Going forward, it will be crucial that the old and new crypto-financial paradigms meet so that a liquidity highway can be designed for DeFi platforms to draw from. This is particularly important as this market suffers from a lack of concentrated capital. But for this to happen, existing players from both centralized and decentralized industry must come together and cooperate with each other.

History should serve as a lesson

There is no doubt that the recent FTX disaster serves as a strong reminder that people should refrain from storing their wealth in exchanges that are not transparent. In this regard, Nana Obudadzie Oduwa, the creator of digital currency Oduwacoin, told Cointelegraph that it is a must for crypto enthusiasts to realize the importance of storing their assets on cold storage and hardware wallet solutions, adding:

“There is no doubt that cryptocurrency is the future of money, and blockchain-based technologies are doing their part to redefine transactions, much like the internet did to the telecommunications industry. However, people cannot trust their money in other people’s hands like exchanges, except when regulated with proof of insured funds.”

Quartly-Janeiro believes that going forward it is important that there is a level of institutional credibility and capacity within the crypto landscape, adding that much like what happened with Lehman Brothers and Barclays back in 2008, liquidity can be an issue in any asset class .

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“While Coinbase and others will continue to attract customers, the size of an entity does not in itself protect it from risk,” he noted.

Finally, Jarvis argues that over the past few years, the core principles of crypto have been compromised due to money, market share and technological expediency. In his view, this latest wave of insolvencies is an ongoing painful episode in crypto’s evolution, one that is likely for the best as it will set the industry on a better path – ie one rooted in its ethos of decentralization and openness. Therefore, as we move into a future powered by decentralized crypto technology, it will be interesting to see how the market continues to evolve and grow from here on out.