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

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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. 

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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 rel­a­tive­ly untrust­wor­thy at this point. 

“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 con­ve­nient for retail traders, adding that there are hard­ly any qual­i­ty DEXs with fea­tures like 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 input. Even if the aver­age retail trad­er uses DeFi, they will most like­ly return 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 select exchanges hence­forth. 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 exchanges may be able to increase their stran­gle­hold; how­ev­er, we will see more and more plat­forms mix­ing DeFi and CeFi into CeDe­Fi, where cus­tomers have the same fan­tas­tic user expe­ri­ence from CeFi, but the trans­paren­cy from DeFi. This will be the road for­ward for crypto.”

Expound­ing his views fur­ther on the mat­ter, he added that over 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 evi­denced through­out the his­to­ry of this decade-old market.

Last­ly, Chen believes that in an ide­al sce­nario, CeFi could pro­vide bet­ter prod­ucts with bet­ter mar­gins and lever­age, while DeFi could offer trust­less cus­tody ser­vices. How­ev­er, as things stand with­in the CeFi area, there are nei­ther on-chain cus­tody ser­vices nor mature reg­u­la­tions like those present with­in the tra­di­tion­al finance industry.

Mov­ing for­ward, it will become imper­a­tive that the old and new cryp­to finan­cial par­a­digms meet so that a liq­uid­i­ty super­high­way can be devised for DeFi plat­forms to draw from. This is espe­cial­ly impor­tant since this mar­ket suf­fers from a lack of con­cen­trat­ed cap­i­tal. How­ev­er, for this to hap­pen, exist­ing play­ers from both the cen­tral­ized and decen­tral­ized indus­tries will have to come togeth­er and work in con­junc­tion with one another.

History should serve as a lesson 

There is no doubt that the recent FTX dis­as­ter serves as a stark reminder that peo­ple should refrain from stor­ing their wealth on exchanges that are not trans­par­ent. In this regard, Nana Obu­dadzie Oduwa, cre­ator of dig­i­tal cur­ren­cy Oduwa­coin, told Coin­tele­graph that mov­ing foward, it is a must that cryp­to enthu­si­asts real­ize the absolute 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 in redefin­ing trans­ac­tions, much in the same way as the inter­net did to the telecom­mu­ni­ca­tions indus­try. How­ev­er, peo­ple can­not trust their mon­ey in oth­er peo­ple’s hands like exchanges, except when they are reg­u­lat­ed with proof of insured funds.”

Quar­t­ly-Janeiro believes that mov­ing ahead, it is impor­tant that there is a lev­el of insti­tu­tion­al cred­i­bil­i­ty and capa­bil­i­ty 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 doesn’t immune it from risk by itself,” he noted.

Last­ly, Jarvis claims that over the past sev­er­al years, the core tenets of cryp­to have been com­pro­mised because of mon­ey, mar­ket share and tech­no­log­i­cal expe­di­en­cy. In his opin­ion, this recent wave of insol­ven­cy is an ongo­ing painful episode in crypto’s evo­lu­tion, one that is prob­a­bly for the best since it will set the indus­try on a bet­ter path — i.e., one that is root­ed in the ethos of decen­tral­iza­tion and trans­paren­cy. There­fore, as we head into a future dri­ven by decen­tral­ized cryp­to tech, it will be inter­est­ing to see how the mar­ket con­tin­ues to evolve and grow from here on out.

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