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Despite the recent implosion of centralized cryptocurrency exchange (CEX) FTX, strategists at JPMorgan led by Nikolaos Panigirtzoglou believe such exchanges will continue to dominate the broader crypto ecosystem as decentralized trading platforms face a number of hurdles.
For starters, decentralized finance (DeFi) protocols rely heavily on CEXs to function properly, and “it would likely take a long time for the center of the price discovery process in the crypto market to shift from centralized exchanges to DeFi,” the team recently wrote in Note for customers. They added that DEXs are not appropriate for big money investors due to their slower transaction speeds or “their trading strategies and order size that are traceable on the blockchain.”
Because (on-chain) DEXs allow everything to be tracked on the blockchain, it is nearly impossible to mix funds without attracting attention. That’s exactly what FTX (off-chain CEX) reportedly did when it lent half of its client funds to its sister company Alameda Research to fund risky bets.
While trading activity on DEXs appeared to have picked up overall over the past few weeks, this early-stage shift is more a function of deleveraging following FTX’s collapse, the team explained. Bernstein highlighted this trend in a note last week, saying that the demise of FTX has made crypto self-custody, which allows users to store their own tokens rather than relying on off-chain exchanges, “back in vogue “ brings.
Additionally, DEX trading volume last month hit its highest level since May, rising to $103.84 billion in November from $57.6 billion in October, data from DeFiLlama showed, indicating reduced confidence in CEXs . Galaxy Digital (OTCPK:BRPHF) founder and CEO Mike Novogratz said the FTX chaos was a “major blow” to trust in the crypto industry and the system.
But JPMorgan still takes the opposite view, noting that DEX lacks limit order/stop-loss functionality, smart contract risks (hacks and protocol attacks), the need for over-collateralization, and bundling of assets into liquidity pools.
“Return-risk trade-off [is] harder to assess in DeFi given the use of different tokens in relation to assets borrowed or lent/interest payments deposited/received and given the general lack of limit order/stop-loss functionality,” reads the notice.
Bitcoin (BTC-USD), the world’s largest digital token by market cap, plummeted by as much as 7.3% in the days following FTX’s Nov. 11 bankruptcy filing, though almost all of those losses were wiped out at the time of writing. All in all, the token was still down over 70% from its peak in November 2021. See why Seeking Alpha contributor Vincent Ventures thinks “FTX pain is Bitcoin’s gain”.
Assessing the DeFi-CeFi debate, SA co-author Craig Pirrong said the FTX demise does not mean that crypto trading centralization is fundamentally flawed, but instead shows the “worst way to pursue centralization.”
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