Decentralized exchanges are not yet ready for derivatives
If the word “derivatives trading” is reminiscent of a suit and leather shoes, unkempt white sleeves rolled to the elbow, and an image of increased expression on the face – like the stuff in “Big Short” – then a decentralized exchange ( DEX) This word will definitely make people think, well, nothing.
There are no offices, no floor traders waving papers, and of course no men in suits. DEX is managed automatically or semi-automatically, and platform participants participate in the process of making key mission decisions. DEX is a systematic light bulb, which brings groundbreaking opportunities for many people, but they are not yet suitable for the derivatives trading soil of the crypto market this season.
This technology is currently unable to have an appropriate option market on DEX, and its complexity reaches the level of your traditional field. Therefore, current products have problems with low capital efficiency, low pricing, and increased risks for traders. People must be put first and layered when technology matures, rather than technology first, to provide decentralization in progressive components.this The success of the dYdX hybrid approach A centralized order book with decentralized custody shows that this is also a viable path for a complete derivatives options suite.
In June, DEX accounted for 9% of the spot trading volume of centralized exchanges (CEX), which was the peak of regulatory crackdowns.
You can also see that during this period, dYdX’s revenue in August also achieved a surge of $11.6 million-this has led to a higher adoption rate of DEX, due in part to its hybrid approach.
A more focused hybrid approach provides opportunities to use these complex financial instruments faster and on a larger scale. Prioritizing true decentralization over more centralized hybrid approaches is a noble approach, but it delays the accessibility of these financial transformation opportunities.
User experience-driven approach
The central exchange is a gateway to a wider audience that has not yet fully adapted to the self-regulatory experience. Not everyone wants to keep their own funds in self-custody. Putting a piece of paper in the wrong place may lose your life savings. This is a very scary concept.
For example, when looking at the chart below, you can see that trading volume (which can be inferred as a certain percentage of new crypto entrants) tends to flow to more centralized exchanges.
Tom Bilyeau, the co-founder and CEO of Impact Theory, may be the perfect anecdote of this preference for centralized trading rather than decentralized trading. Tom is relatively new to cryptocurrency, he knows him”should“Self-custodial of his assets. In his recent honesty acknowledgment interview However, together with Robert Breedlove, he explained that he tends to keep his cryptocurrency on the exchange due to the security and friction of the substitution process. Of course, Twitter is full of “don’t be like Tom” rebuttals, but if we want to develop as an industry, we can’t write down such things. Tom is going through the same encryption adoption life cycle as many others. A large number of people don’t even want to consider safety issues. They want exchanges to take the risks of their counterparties so they can continue to live their lives.
This is valid, if there is no greater reason than this sentiment, just as the self-sovereign vision of crypto utopia is valid.
Of course, there are solutions to this problem. People may prefer self-custody for many reasons, but the fact remains that this is not an ideal experience for everyone. The point here is that we have to meet people where they are.
Everyone can access the future
Cryptocurrency is a huge financial knowledge project. Take the 2007 subprime mortgage crisis as an example.The problem is not that derivatives are so complicated, such as files or Chief Marketing Officer, Is essentially wrong, the fact is that the products sold are not transparent or audible. The unknown risk exists in a system where no one knows it exists, and then it crashes. Using encryption technology, all content in the entire financial stack is completely transparent and auditable in real time. Out of necessity, people understand the margin system, loan system, and other traditional and complex concepts, otherwise these concepts are unattractive or unavailable to them.
Centralized cryptocurrency exchanges know that if they are not satisfied, anyone can learn, audit, and transfer their assets to another platform, which will make the exchange liable. Unlike banks, users can directly withdraw assets to the blockchain. Exchanges need users to do the right thing, lest they go elsewhere. In DEX, this is a clear accountability gap. If there is a problem, who is behind to help solve the mess?
According to a report by the crypto research company Messari, this is especially important when you consider this. DeFi protocol has been lost Since 2019, approximately $284.9 million has been spent on hacking and other exploit attacks. At present, the decentralized insurance industry only covers a small part of the total value locked in DeFi (TVL), which represents the sum of all assets stored in the DeFi agreement to receive rewards, interest, new coins and tokens, fixed income, etc.
With new DeFi hackers appearing in cryptocurrencies every other day, centralized exchanges or custodians that can provide greater peace of mind through insurance and counterparty risk are the smoothest entry to the industry.
Decentralization is the ultimate goal
Of course, decentralization is the ultimate goal. It is ideal for users to control their own assets. In terms of direction, this is the development direction of the industry, but we cannot require users to join in before the technology is ready. Technologists have a responsibility to obtain decentralized technology where they need to use it first. It is conceivable that DEX is full of hope for the future of derivatives trading, but not at the expense of security, speed and availability.
This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.
The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Tom HowardThe business development and growth of PowerTrade is a product geek, founder and angel investor obsessed with reshaping money and finance. As an early investor in cryptocurrency and the founding partner of the blockchain investment group Taureon, Tom has witnessed everything from the boom and bust to the huge challenges faced by users trying to use cryptocurrency as electronic cash. As the co-founder of DeFi Nation and the former co-founder of Mosendo, Tom brings his rich knowledge of decentralization to the world of crypto derivatives.