Decentralized exchanges aren’t ready for derivatives


If the words “derivatives trading” conjures up images of men in suits with disheveled white sleeves rolled up to their elbows and exaggerated expressions on their faces – like something from The Big Short – then the word decentralized exchanges (DEX ) should conjure up, well, nothing.

There are no offices, no traders 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 of a system that is creating revolutionary opportunities for many, but they are yet to adapt to the ground of derivatives trading in this crypto market season.

The technological divide

The technology is not available at this time to have a proper options market on a DEX with the level of sophistication you find in the traditional space. Current offers therefore suffer from inefficiencies in capital, poor prices and additional risks for traders. Instead of technology first, people must be put first and technology must be integrated as it matures, providing decentralization into progressive components. The success of dYdX’s hybrid approach of a centralized order book with decentralized custody shows that it is also the viable path for a full suite of derivative options.

The percentage of DEX to centralized spot trading (CEX) volume was 9% in June, which was the peak of regulatory crackdown.

You can also see that during this period, dYdX also saw a peak revenue of $ 11.6 million in August, which resulted in a higher adoption rate of DEX, in part thanks to its approach. hybrid.

A more centralized hybrid approach offers the possibility of using these sophisticated financial tools earlier and at scale. Prioritizing true decentralization over a more centralized hybrid approach is noble, but it delays the accessibility of these opportunities for financial transformation.

User experience leads the way

The central exchanges are a gateway to a larger audience that is not yet comfortable with the full self-guard experience. Not everyone wants to have personal custody of their funds. The fact that you can lose all your savings by misplacing a piece of paper is a pretty scary concept.

For example, looking at the chart below, you can see that the volume, which can be inferred as a certain percentage of new entrants into the crypto, tends to move towards more centralized exchanges.

Tom Bilyeau, co-founder and CEO of Impact Theory, could be the perfect anecdotal example of this preference of the feeling of centralized exchange over decentralized exchanges. Tom is relatively new to crypto, he knows he “should”Self-guard his property. In an honest admission in his recent interview with Robert Breedlove, however, he explains his preference for keeping his crypto on an exchange due to the security and friction of the alternative process. Of course, Twitter was buzzing with “don’t be like Tom” counter-narratives, but if we’re going to grow as an industry, we can’t suppress that stuff. Tom goes through the same crypto adoption lifecycle that many people do. There is a large part of the population who does not even want to think about security. They want the exchanges to take the counterparty risk so that they can continue to live their lives.

This is valid, if only for a greater reason that this feeling only exists just as the self-sovereign vision of Crypto-Utopias is valid.

Of course, there are solutions to solve this problem and for various reasons people may prefer to self-guard, but the fact remains that it is not an ideal experience for everyone. The point here is that we have to meet people where they are.

Related: Decentralization vs. centralization: where does the future lie? Expert response

The future is accessible to all

Cryptocurrency is a massive financial literacy project. Take, for example, the subprime mortgage crisis of 2007. The problem wasn’t that complicated derivative tools, like tranches or CMOs, were inherently flawed, it was the fact that there was no transparency. or audibility of the products that were sold. Invisible risks lay in the system that no one knew existed, and then it collapsed. With crypto, everything across the financial stack is fully transparent and auditable in real time. Out of necessity, people are familiar with margin systems, lending systems, and other traditional and complex concepts that were otherwise unappealing or inaccessible to them.

Centralized crypto exchanges know that anyone can learn, audit, and transfer their assets to another platform if they are not satisfied, which holds the exchanges to account. Unlike banks, users can withdraw their assets directly into the blockchain. Exchanges must be done correctly by the user, lest they go elsewhere. In a DEX, this is a glaring liability gap. If something is wrong, who is there to help fix the mess?

This is especially important when you consider that, according to a report by crypto research firm Messari, DeFi protocols have lost around $ 284.9 million due to hacks and other exploitative attacks since 2019. At the Currently, the decentralized insurance industry only covers a fraction of the Total Locked-In Value (TVL) in DeFi, which is the sum of all assets deposited into DeFi protocols earning rewards, interest, new coins and tokens, fixed income securities, etc.

With new DeFi hacks appearing in crypto like everyday, centralized exchanges or custodians that can offer greater peace of mind through insurance and counterparty risk are the most fluid ramps in the world. sector.

Decentralization is the end goal

Of course, decentralization is the end goal. Users controlling their own assets are ideal. Directionally, this is where the industry is headed, but we cannot ask users to step in until the technology is ready at their expense. The onus is on technologists to get decentralized technologies where they need to be first. DEXs are likely to hold great promise for the future of derivatives trading, but not at the expense of safety, speed, and availability for everyone.

This article does not contain any investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research before making a decision.

The views, thoughts and opinions expressed here are those of the author alone 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 reinventing money and finance. As the first cryptocurrency investor and founding partner of blockchain investment group Taureon, Tom has seen it all from the ups and downs to the enormous challenges users face when trying to use cryptocurrencies. as electronic money. As co-founder of DeFi Nation and former co-founder of Mosendo, Tom brings his immense knowledge of decentralization to the world of crypto derivatives.