(Our weekly analysis of the wild world of cryptocurrencies)
As the crypto castle crumbles, some true believers say the answer is to double down on DEX. Decentralized exchanges, that is.
The spectacular collapse of Sam Bankman-Fried's FTX, a major centralized crypto exchange, has unleashed a wave of calls for more regulation from mainstream bankers and investors.
By contrast, some crypto players are channeling bitcoin creator Satoshi Nakamoto's original crypto vision by cutting out the financial middleman and taking to decentralized exchanges, where investors trade peer-to-peer on the blockchain.
On Nov. 10, as FTX imploded, overall daily trading volumes on DEXs including the likes of Uniswap leapt as high as $12 billion, their highest level since May, according to data from market tracker DeFi Llama, though they have since pared gains.
Four days later, November volumes had surpassed the whole of the month before, according to CryptoCompare.
Meanwhile, weekly bitcoin flows from centralized exchanges, or CEXs, recorded their largest-ever net outflow, with 97,805 coin moved off platforms in the seven days to Nov. 13, CryptoCompare data shows.
"It is now clear that there can be risk associated with holding assets in a centralized entity," said Varun Kumar, CEO of decentralized crypto exchange Hashflow. "Data is showing that users are turning to decentralized trading solutions."
Nonetheless, DEXs are not necessarily safer than their centralized rivals, with inexperienced investors potentially exposed to huge risks.
Users trade tokens directly with each other using blockchain-based smart contracts instead of passing funds through an intermediary or central authority.
Thus, as with other platforms in the world of decentralized finance (DeFi) or Web3, there is no central oversight and - for good or for ill - investors are responsible for their trades, settlements and safe-keeping of coins or tokens.
By comparison CEXs, such as Coinbase, Binance and FTX, are more akin to traditional exchanges on Wall Street, acting as the middleman in transactions, thus making trading more user-friendly especially for new investors, and sometimes offering coin custody services, as FTX did.
Many centralized players have also been pushing to boost user confidence with measures to increase transparency, such as demonstrating proof of their reserves.
Coinbase, Binance and FTX didn't immediately respond to requests for comment.
That said, advocates of decentralization say DEXs could offer investors some protection from the kind of shenanigans that appear to have gone on at FTX, where as much as $1 billion of customer funds are reported missing.
DEXs cannot halt withdrawals, they require users to retain custody of their funds, and trading activity and reserves can be traced directly on the blockchain.
"There are definitely elements of DEXs appealing to people as they mitigate the chances of some nefarious operator or a single point of failure in the system," said David Wells, CEO at crypto exchange Enclave Markets, which offers elements of both centralized and decentralized services.
The FTX crash certainly pumped up trading volumes on decentralized exchanges at the time.
Volumes at the largest DEX, Uniswap, spiked to $17.2 billion in the week of Nov. 6-13, from just over $6 billion the week before, while other smaller decentralized exchanges also reported higher volumes.
GMX saw over $6 billion in the week after Nov. 6, when FTX's troubles came to light, three times recent its weekly averages. Hashflow saw $110 million on Nov. 9, the day Binance dropped a plan to bail out FTX, versus a daily average of $25 million.
Despite the recent surge, crypto isn't migrating en masse to DeFi exchanges, and daily DEX volumes have fallen back near October levels of below $3 billion.
Nonetheless, there has been a broader, more subtle shift to decentralized exchanges, with data from Chainalysis showing overall monthly trading volumes on DEXs were between $181.5 billion and $240.3 billion from August through October, compared with a range of $173 billion to $203.5 billion for CEXs.
LOWER TRADE SPEEDS
The renewed interest in DEXs ties into the debate at the heart of crypto since Satoshi Nakamoto's bitcoin white paper 14 years ago: the role, if any, that centralization and regulation should play in the crypto ecosystem.
While some investors prefer the transparency of decentralized exchanges, the platforms aren't suitable for investors such as traditional financial institutions and specialized trading firms, said Wells at Enclave Markets.
For example, DEXs typically have slower transaction speeds, while hedge funds might not want their trading strategies to be publicly traceable on the blockchain.
Many traditional finance institutions are also legally required to hold external funds with an external custodian and would not be able to "self-custody" investors' assets to trade them on decentralized exchanges.
So is the future DEX or CEX?
Many market participants see both centralized and decentralized exchanges coexisting.
"The interconnectedness is critical," said Chris Kline, co-founder of Bitcoin IRA, which offers cryptocurrency retirement accounts, referring to DEXs and CEXs growing together as crypto trading expands.
"Both will exist in the future."
(Reporting by Lisa Pauline Mattackal and Medha Singh in Bengaluru; Editing by Vidya Ranganathan and Pravin Char)