If the words “derivatives trading” conjure up images of men in suits with scruffy white sleeves rolled up to the elbows and exacerbated expressions on their faces – like something out of The Big Short – then the term decentralized exchanges (DEX) should evoke, well, nothing. .
There are no offices, no traders in the trading room waving papers, and certainly no men in suits. DEXs are managed automatically or semi-automatically with the participation of platform participants in the critical decision-making process. DEXs are a bulb in a system that is sparking innovative opportunities for many, but they are still not suitable for the derivatives trading arena in this day and age of the cryptocurrency market.
The technology gap
The technology is not available right now to have a proper options market in a DEX with the level of sophistication found in the traditional space. Therefore, the current offers present capital inefficiencies, poor pricing, and added risk for traders. Instead of putting technology first, you have to put people first and layered technology as it matures, providing decentralization into progressive components. The success of dYdX’s hybrid approach, consisting of a centralized order book with decentralized custody, demonstrates that this is the viable avenue for a full suite of derivatives options.
The percentage of spot trading volume of DEXs compared to centralized (CEX) stood at 9% in June, which was the high point of the regulatory measures.
You can also see that during this time, dYdX also posted a revenue spike of $ 11.6 million in August, leading to a higher DEX adoption rate, thanks in part to its hybrid approach.
A more centralized hybrid approach offers the opportunity to use these sophisticated financial tools sooner and at scale.. Giving a rigid priority to true decentralization over a more centralized hybrid approach is noble, but it delays the accessibility of these financial transformation opportunities.
User experience drives the way
Centralized exchanges are a gateway to a broader audience that is not yet comfortable with the full experience of self-custody.. Not everyone wants to have self-custody of their funds. The fact that you could lose your life savings by misplacing a piece of paper is a pretty scary concept.
For example, looking at the graph below, you can see that the volume, which can be inferred as a certain percentage of new entrants to the cryptocurrency space, tends to flow to the more centralized exchanges.
Tom Bilyeau, Co-Founder and CEO of Impact Theory, could be the perfect anecdotal example of this sentiment preference towards centralized over decentralized exchanges. Tom is relatively new to the world of cryptocurrencies and knows that “it should“Self-safeguard your assets. However, in an honest admission in your recent interview with Robert Breedlove, you explain your preference for keeping your crypto on an exchange, due to the safety and friction of the alternative process. Of course, Twitter was filled with counter-retorts. “Don’t be like Tom” kind of thing, but if we want to grow as an industry, we can’t rule out things like this. Tom is going through the same crypto adoption life cycle as many people. There is a large segment of the population that does not even want to think about security. They want exchanges to take counterparty risk so they can continue to live their lives.
This is valid, if only for the fact that this sentiment exists just like the self-sovereign vision of cryptocurrencies utopians.
Of course, there are solutions to solve this and a variety of reasons why people may prefer self-custodyBut the fact is, this is not an ideal experience for everyone. The point here is that we must meet people where they are.
The future is accessible to all
Cryptocurrencies are a massive financial education project. Take, for example, the subprime mortgage crisis in 2007. The problem was not that the complicated tools of derivatives, such as terms or CMOs (Home Equity Obligations), were inherently wrong, but the fact that there were no transparency or audibility of the products being sold. Invisible risks resided in the system that no one knew existed and then it collapsed. With cryptocurrencies, everything in the financial stack is fully transparent and auditable in real time. By necessity, people learn about margin systems, loan systems and other traditional and complex concepts that were not otherwise attractive or available to them..
Centralized crypto exchanges know that anyone can learn, audit and switch their assets to another platform if they are not satisfied, which makes the exchanges liable.. Unlike banks, users can withdraw their assets directly on the blockchain. Exchanges have to do the right thing for the user, so that they do not go to another site. In a DEX, this is an obvious lack of responsibility. If something goes wrong, who is behind to help fix the problem?
This is especially important considering that, according to a report by cryptocurrency research firm Messari, DeFi protocols have lost an estimated $ 284.9 million to hacks and other exploit attacks since 2019. At this time, the decentralized insurance industry only covers a fraction of the total locked value (TVL) in DeFi, which represents the sum of all the assets deposited in the DeFi protocols that earn rewards, interest, new coins and tokens, fixed income, etc.
With the emergence of new DeFi hacks in cryptocurrencies, that seem to happen very frequently, centralized exchanges or custodians that can offer greater peace of mind through insurance and counterparty risk are the easiest entry ramps for the industry.
Decentralization is the ultimate goal
Of course, decentralization is the ultimate goal. Users controlling their own assets is ideal. In this sense, it is where the industry is heading, but we can’t ask users to launch before the tech is ready at your expense. It is the responsibility of technologists to get decentralized technologies to where they need to be first. DEXs may hold great promise for the future of derivatives trading, but not at the cost of security, speed, and availability for everyone.
This article does not contain investment advice or recommendations. All investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Tom howard, business development and growth at PowerTrade, is a product geek, founder and angel investor obsessed with the reinvention of money and finance. As an early cryptocurrency investor and founding partner of blockchain investment group Taureon, Tom has seen it all from booms and busts to the enormous challenges users face when trying to use cryptocurrencies as electronic money. . As a co-founder of DeFi Nation and previously a co-founder of Mosendo, Tom brings his immense knowledge of decentralization to the world of crypto derivatives.
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