Bitcoin’s expected bullish rally and the recent wave of corporate and institutional investors allocating a significant portion of their reserves to Bitcoin (BTC) are signs that the pace of cryptocurrency integration is accelerating rapidly: but the way forward? Does mass adoption have data protection and decentralization costs?
Knowing that your customers and anti-money laundering laws have forced most cryptocurrency exchanges to be more transparent about who their users areand those who refused have had to restrict the jurisdictions in which they can provide services.
To operate legally in many countries, Many exchanges had no choice but to adhere to strict AML procedures Aside from Monero (XMR), privacy coin sectors have been removed from most major exchanges.
Recently, Regulators have started to wave the whip, and jurisdictions around the world continue to spread new measures to ensure investors disclose their cryptocurrency holdings and pay taxes on their profits.
And all of this comes when the U.S. Department of Justice arrested the BitMEX co-founder and the CFTC accused its owners of running an illegal crypto derivatives exchange.
About a week later, the Financial Conduct Authority, the UK’s main regulatory body, went so far as to ban investors from trading derivatives on all cryptocurrency exchanges.
All of these maneuvers are aimed at enforcing compliance by crypto service providers, and while they can ultimately help fuel mass adoption, many crypto ideologues are looking for alternatives to fuel financial self-sovereignty.
Decentralized exchange can be the solution
A growing number of investors believe that centralized crypto exchanges function in much the same way as traditional banks.. In response, decentralized exchanges like Uniswap, 1inch, Curve Finance and Balancer became increasingly popular over the course of 2020.
For the more discerning investors, there are also decentralized exchanges that offer trading in derivatives. As with traditional derivatives, the cryptocurrency exchanges that offer the service essentially act as brokers, but the process is slightly different with decentralized exchanges.. This is because they use smart contracts instead of a broker and derivative contracts are settled when the terms of the contract are met.
Synthetix is currently one of the most popular decentralized futures exchanges. In 2020, the total locked value rose to $ 1 billion before a major industry-wide correction caused the total locked value to decline. (TVL) and daily active users in most DEX markets.
The exchange allows users to create an instrument called a “synth” from synthetic assets that can be used to track gold, fiat currencies and cryptocurrencies.. It also enables the creation of assets that track the price of assets in reverse order.
Platform users can also use the native SNX token as security for new synthesizers. As with Uniswap, those who provide liquidity are rewarded with a share of the exchange’s transaction fees.
Those familiar with DEX like Uniswap will know that literally anyone can list a new asset, which in the case of derivatives means that any underlying asset can be converted into a derivative instrument.
These platforms allow users to trade derivatives without having to deposit funds on a central platform, and they do not need to complete KYC procedures.
While some investors avoid KYC and tax compliance, it is serious business for cryptocurrency service providers. According to Molly Wintermute As an anonymous developer credited with founding Hegic DEX, compliance is more of an issue for centralized cryptocurrency service providers than DEXs.
When asked how DEXs can continue to comply with financial regulators, Wintermute stated bluntly in a unique slang:
“They can’t. This is a new layer of financial infrastructure, not an addition to the current financial system. It’s like TCP / IP or FTP, not just a decentralized cryptocurrency exchange. You can’t stop the Z-code or ban the internet. Be it.” because, you The public blockchain is open and without permission it is almost impossible to ban decentralized derivative protocols. “
Wintermute went on to explain that decentralized derivatives are attractive to a certain subset of investors because:
“Non-custodial trading (the protocol / people don’t hold funds as the funds are allocated in smart contracts). Verified chain settlement (there is no way to manipulate cheap Z derivatives, and there are no tight code trading algorithms that only exchange owners can work / manipulate). Lower liquidity (the new peer-to-pool / peer-to-contract model could offer lower margins and better terms for 4 users) “.
According to Wintermute The number of investors who actually use DEX is quite small compared to the total number of crypto investors. For Wintermute, this means that the FCA’s derivative ban and recent legal action against BitMEX are completely irrelevant and do not apply to decentralized financial protocols.
“The decentralized derivative is part of the small crypto world. There are more than 100 million cryptocurrency holders worldwide. About 5-10 of them were able to actively trade crypto derivatives (worldwide). I don’t think the FCA ban opened up any interesting new opportunities. Nothing has changed”.
After Wintermute was pressured to explain the possibility that the SEC, FCA, or other regulators may not try to shut down a platform like Uniswap and arrest its founders, he said:
“You could probably arrest 1 or 2 CEOs like the founders of Bitmex who have some shady things internally, but only to scare everyone else. You can’t arrest everyone. Also compare decentralized derivatives to cryptocurrencies used for drugs. These two things come from different sides of the spectrum. a toy with decentralized derivatives and a weapon with drug dealers who use crypto. Decentralized derivatives are not a crime. “
Wintermute also seemed to shake off the recent BitMEX scandal, snapping back the following:
“I don’t think anyone is interested in DeFi or DEX. The guys at bitmex have so much shady stuff inside that this could be a great target, while DeFi / DEX logs are 100% transparency and you can’t jail a person to create a website with numbers that are transparent to everyone else in the Z world. “
Finally, Wintermute believes that “the guys from Bakkt / CME and wall st — are so mad that no one is using their products from my *** that they are now taking crypto entrepreneurs and trying to send them to jail.”
The anonymous developer then stated that in his view the “metagame is to ban all cool crypto products and try to cannibalize their user base, but with delusional products.”
While some of Wintermute’s bold claims may be justified, the arm of the law is quite long, and as we’ve seen in the now-defunct era of ICOs, it takes time to include those who violate securities laws.
In 2020, the total value locked on DeFi platforms rose to $ 12.6 billion. Data from Dune Analytics shows that Uniswap processed a volume of $ 11.2 billion in October. These massive numbers are sure to grab the attention of US and international regulators. As such, it may only be a matter of time before legal action is taken against DEXs.
The decentralized exchange is a test field for solutions of the second layer
In addition to addressing privacy concerns and restoring the decentralization of the cryptocurrency sector DEXs also provide a sandbox for second-level developers. As Cointelegraph has reported, scaling within the Ethereum network has been an ongoing challenge.
If the network is congested during times of high demand, gas rates will increase exponentially and the speed of transactions will stop. With Ethereum 2.0 in perceptual “evolution”, various DEXs have started experimenting with integrating second-layer solutions to provide cheaper and faster options for users who are willing to forego the Ethereum network.
Project Serum is probably one of the best-known success stories for a non-Ethereum DEX.
The decentralized derivatives-based project is based on the Solana blockchain rather than the standard Ethereum network that most DEXs work with, but is also fully compatible with ERC-20 and Bitcoin-based assets.
Sam Bankman-Fried, CEO of FTX, and his team are the brains behind Project Serum and, according to Bankman-Fried The project aims to circumvent the privacy and security concerns of centralized exchanges by providing users with a permissionless method to invest and exchange assets with leverage.
The project also offers a cheaper alternative to the high gas rates and slow transaction speeds that plague the Ethereum network during times of heavy traffic.
“To develop a product that enables fast and economical job matching, you need a high-throughput chain. This demand is further increased in order to trade non-standardized markets and handle risks or liquidations. Serum chose to build on Solana because the chain focused on a unique and powerful vision on scale. “
According to Bankman-Fried, technical issues like congestion and high fees can make or break an investor. Regarding the high fees, he said:
“They are fatal: Basically you cannot have any derivatives on Ethereum due to problems of scale. As far as decentralized derivatives have growth opportunities, they will be in a new L1 or L2. “
Bankman-Fried also agreed with Wintermute’s claim that hardly anyone uses DEX because “the vast majority of derivatives volume happens on centralized exchanges,” but theoretically suggested that “composability and self” custody “should be an incentive for more users to choose themselves to join the movement.
A DEX to rule them all
Currently, investors have turned their attention to Bitcoin as the digital asset hits a new all-time high. Data from Cointelegraph and Digital Assets Data show DEX’s trading volume and daily active users continue to decline.
While this is likely to be disappointing for investors, At the very least, developers have a quiet moment to focus on properly integrating Layer 2 solutions with DeFi protocols.
It is unlikely that the major crypto exchanges trend towards centralization will change anytime soon. This means that the first DEX to successfully deliver a platform with low fees, privacy, and a fast, easy-to-use interface will be a top priority once investors make the decision to invest in decentralized financing and decentralized derivatives again.