If the phrase “trading in derivatives” evokes images of men in suits with fur-clad white sleeves folded at the elbows and blushing expressions on their faces – like something from The Big Short – then the word “decentralized exchange” (DEX) should arouse imagination, well, well, nothing like that.
There are no offices here, no dealers waving papers, much less men in suits. DEXs are managed automatically or semi-automatically with the participation of platform participants in the critical decision-making process. DEX is a light bulb of a system that offers many innovative opportunities, but they are not yet suitable for derivatives trading in this season of the cryptocurrency market.
This technology is currently not available for a suitable DEX options market with the level of complexity found in the traditional space. Consequently, the current offer suffers from capital inefficiency, low prices and increased risk for traders. Instead of technology first, people should come first, and technology should be layered as it evolves, to ensure that progressive components are decentralized. The success of dYdX’s hybrid approach to central order issuers with decentralized custody shows that this is also a viable route for the entire derivative pool.
The DEX to Central Exchange Spot (CEX) ratio was 9% in June, amid regulatory action.
You can also see that during this time, dYdX also saw $ 11.6 million in revenue growth in August, resulting in a higher usage rate for DEX, thanks in part to its hybrid approach.
A more centralized hybrid approach makes it possible to use these complex financial instruments at the earliest stage and on the largest scale. Strictly prioritizing true decentralization over a more centralized hybrid approach is a noble approach, but it delays access to these opportunities for economic transformation.
User experience is the key
Central exchanges are the gateway to a wider audience who do not yet feel comfortable with the full experience of self-defense. Not everyone wants to keep their money in check. The fact that you can lose all your savings by losing a piece of paper is a very scary idea.
For example, if you look at the chart below, you can see that volume, which can be defined as a certain percentage of new entrants to a cryptocurrency, tends to spread to more centralized exchanges.
Tom Bilhao, co-founder and CEO of Impact Theory, can be a great anecdotal example of this preference for centralized over decentralized exchange. Tom is relatively new to the cryptocurrency business and knows that he “should” keep the assets to himself. In a recent interview with Robert Breedlove, frankly, he explained that he prefers to keep cryptocurrencies on the stock exchange with the security and difficulties of an alternative process. Of course, Twitter was full of “Don’t be like Tom” counter-stories, but if we want to grow as an industry, we can not write such things. Tom goes through the same life cycle of cryptocurrency adoption for many people. There is a large part of the population that does not even want to think about safety. They want the stock exchanges to take counterparty risk so that they can move on with their lives.
This is true unless there is a more compelling reason than this feeling, just as the belief that Crypto-Utopiates is self-dominated is correct.
Of course, there are solutions to this problem and many reasons why people may choose to self-medicate, but the fact remains: this is not an ideal experience for everyone. The point is, we need to meet people wherever they are.
Related topics: Decentralization vs centralization: Where is the future? Expert answer
The future is available to everyone
Cryptocurrency is a huge project for financial expertise. Take, for example, the mortgage crisis in 2007. The problem was not that complex derivatives such as planks or CMOs were inherently faulty, but that the products sold were not transparent or audible. Invisible dangers lay in a system that no one knew existed and then collapsed. Thanks to encryption, everything in the entire financial package is completely transparent and verified in real time. People need to learn about margin systems, credit systems and other traditional and complex concepts that were unattractive or unattainable to them.
Centralized cryptocurrency exchanges know that anyone can explore, view and transfer their assets to another platform if they are not satisfied, which makes the exchanges responsible. Unlike banks, users can withdraw their assets directly to the blockchain. Exchanges must be done correctly by the user so that they do not move to another location. At DEX, this is a clear responsibility gap.