This year has shown no mercy. Aside from conflict, general economic downturn, and global energy crisis, the crypto winter has well and truly set in.
Once the land of plenty, cryptocurrency exchanges have been dropping like flies.
It is estimated that the total value of the cryptocurrency market dropped from around $3 trillion to $1 trillion in the first half of this year. Both ethereum and bitcoin, along with others, crashed to over half of their valuation at the beginning of 2022, causing a tidal wave of issues in the digital asset space.
The first echoes of the devastation to come followed the downfall of algorithmic stablecoin, Terra. This caused critical problems for major centralized lenders in the DeFi space, causing a knock-on effect for the world around them.
“This year, we’ve seen a drastic market downturn,” said Adam O’Neil, CMO at Bitrue. “A crash that has not only squeezed out the short-term speculators but also triggered the sell-offs by long-term holders, largely exacerbated by the Terra debacle.”
“As a result, some big crypto exchanges are facing a bank run essentially, which is mostly affecting lending platforms rather than exchanges.”
As the months have rolled, the news is scattered with tales of staff layoffs and bankruptcy, seeing some of the DeFi world’s largest institutions crumble by the wayside.
However, there are survivors. Aside from the decentralized exchanges and lenders that resisted significant issues, some centralized entities seem to have weathered the storm.
- The best DeFi play for TradFi
- The critical differences between CeFi and DeFi and why rash regulation could damage development
- Institutionalization of the DeFi’ wild west’: why regulation is key
Ce versus De – the eternal debate
According to some experts, the Centralized vs. Decentralized factor has played a significant part in this downfall.
“You saw that DeFi kept working perfectly fine (in the recent downturn),” said Eduardo Abreu, Chief Strategy Officer at Amberfi. “There was stress, and the system worked. You got liquidated if the price went down and your loan was underwater. That was what would have been expected. No intermediary was left holding the bag; it was just you.”
“Essentially, CeFi gives users an IOU,” said Marcel Harmann, Founder, and CEO of THORWallet DEX. “The economic fallout came as a result of CeFi. Decentralized technologies allow for coordinating resources and efforts that would otherwise be distributed. This helps eliminate obstructions to the global financial system, poking a hole in the bubble of centralized wealth.”
Despite this, many centralized entities attempted to implement tactics to curb some of the effects and keep their companies afloat.
“Much like banks, many of these exchanges and platforms don’t hold 100% of user deposits as liquid assets,” said O’Neil. “They can only meet a certain percentage of their obligations towards their users, so if many users start withdrawing assets all at once, they cannot fulfill all those requests.”
“The simplest solution for them is just to shut down all withdrawal requests completely until they can either acquire liquid assets or demand dies down.”
This tactic is akin to the traditional “bank run,” mirroring the centralized nature of the exchanges and platforms. Ironic when working within the DeFi market, a space that claims within its name to hold decentralization at its core.
“It’s a gamble that exchanges take because it may be that a timeout helps everyone to calm down and quells the situation, or it might just result in causing more panic and result in mass selling on dexes.”
Halting withdrawals: is it really the best tactic?
Halting withdrawals doesn’t guarantee success. Celsius, the crypto lending platform that recently declared bankruptcy, halted withdrawals earlier this year, followed by depleted trust and further legal issues.
Bitrue has, however, ridden out the crypto winter without the implementation of such tactics. Earlier this year, O’Neil is quoted as saying, “It’s a very bad look for an industry that supposedly prides itself on decentralization and breaking away from the traditional financial systems.”
He told Fintech Nexus, “Savvy exchanges can implement various marketing strategies for any situation.”
“For example, if it looks like a sudden crash is imminent, and they wish to discourage the selling of a particular asset, they can increase the savings rate available for it in their staking product or introduce a new staking product with a lockup component which will effectively take assets out of circulation for a period of time.”
“In general terms, during a bear market, the successful exchanges are the ones that limit their exposure to risk and avoid taking on large amounts of debt to fuel their growth.”
“Exchanges should also be taking proactive steps to reduce their customers’ losses, regardless of the size of crypto assets they own. Cryptocurrency exchanges can step up their efforts to advise their customers, particularly small-assets owners, to avoid high-risk investment behavior even if it would result in reduced revenue for the exchanges themselves.”
And then TradFi makes its play…
Amid the crypto platform turmoil today, Sept. 13, 2022, various financial giants announced their creation of a new crypto exchange.
Charles Schwab, Citadel Securities, Fidelity Digital Assets, and others announced the launch of EDX Markets, “a first-of-its-kind exchange that will address latent demand for digital asset trading by enabling safe and compliant trading of digital assets through trusted intermediaries.”
This news follows the trend of traditional finance becoming more involved in the DeFi sector.
EDXM’s Board of Directors commented, “Cryptocurrency is a $1 trillion global asset class with over 300 million participants and pent-up demand from millions more. Unlocking this demand requires a platform that can meet the needs of both retail traders and institutional investors with high compliance and security standards.”
“With MEMX-supported digital infrastructure that eliminates technological and organizational bottlenecks, EDXM will be a safe entry point to crypto and serve as the exchange of choice for trading digital assets on a platform designed for and used by leading financial institutions.”
Claiming to uphold customer security and regulatory compliance as core fundamentals, the press releases state that the new exchange will “remove significant conflicts of interest that affect existing cryptocurrency exchanges by separating responsibility for operating the exchange from the entities trading on it.”
Overall, veterans in the crypto space are positive about the news.
“Overall, the team-up between Fidelity, Charles Schwab, and Citadel is a good sign for crypto, as new money from the traditional and institutional world will flow in,” said Marcel Harmann, Founder and CEO of THORWallet DEX.
“This is a logical business step for traditional financial institutions too. Following years of rapprochement, the heavyweights of traditional finance have accepted cryptocurrencies and digital assets as their own asset class. Instead of trading and paying fees to an external third-party exchange, founding their own exchange makes the most business sense. The move is also indicative of how crypto, despite unfavourable market conditions, is becoming a part of regular business operations.”
Daniel Keller, Founder and CEO of Flux agreed but felt it could mark a significant change for the future of the crypto space.
“The introduction of the TradFi giants into the world of centralized exchanges is very interesting,” he said. “It’s positive that legacy-based institutions are finally getting onboard with the blockchain benefits, and it is likely to force already existing exchanges to do better for the customers’ needs.”
“However; the idea of organic growth is becoming less and less realistic as larger money enters the space.”
“This is the beginning and I almost certainly see DeFi being a target in the long run for some deep regulatory changes.”