If the words "derivatives trading" conjure up images of men in suits with scruffy white sleeves rolled up to the elbows and exacerbated expressions on their faces, like something out of The Big Short, then the word decentralized exchanges (DEX) should evoke, for nothing .
There are no offices, no floor traders waving papers, and certainly no men in suits. DEXs are managed automatically or semi-automatically with the participation of platform participants in the mission-critical decision-making process. DEXs are a focus of a system that is generating innovative opportunities for many, but they are not yet suitable for the derivatives trading arena in this season of the cryptocurrency market.
The technology gap
The technology is not available at this time to have a proper options market in a DEX with the level of sophistication found in the traditional space. Current offerings therefore suffer from capital inefficiencies, poor pricing, and additional risk for traders. Instead of technology first, people must be put first and technology layered as it matures, providing decentralization in progressive components. the success of dYdX's hybrid approach from a centralized order book with decentralized custody shows that this is also the viable route for a full set of derivatives options.
The percentage of DEX to centralized exchange (CEX) spot trading volume was 9% in June, which was the peak of regulatory crackdown.
You can also see that during this time, dYdX also posted an $ 11.6 million increase in revenue in August, leading to a higher DEX adoption rate, thanks in part to its hybrid approach.
A more centralized hybrid approach provides the opportunity to use these sophisticated financial tools earlier and on a larger scale. Rigidly prioritizing true decentralization over a more centralized hybrid approach is noble, but it delays the accessibility of these financial transformation opportunities.
User experience drives the way
Core exchanges are a gateway to a broader audience that is not yet comfortable with the full self-care experience. Not everyone wants to have custody of their funds. The fact that you could lose your life savings by losing a sheet of paper is a pretty scary concept.
For example, by looking at the chart below, you can see that volume, which can be inferred as a certain percentage of new entrants to crypto, tends to flow towards more centralized exchanges.
Tom Bilyeau, Co-Founder and CEO of Impact Theory, could be the perfect anecdotal example of this preference for centralized exchange sentiment over decentralized exchanges. Tom is relatively new to crypto, he knows that "should“Self-custody of your assets. In a heartfelt admission to your 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 full of "don't be like Tom" counter-statements, but if we want to grow as an industry, we can't rule out things like this. Tom is going through the same crypto adoption life cycle as many people. There is a large segment of the population that does not even want to think about security. They want exchanges to take counterparty risk so they can go on living their lives.
This is valid, if not for a greater reason than this sentiment simply exists, just as the self-sovereign vision of crypto-utopians is valid.
Of course, there are solutions to solve this and a variety of reasons why people may prefer self-custody, but the fact is that this is not an ideal experience for everyone. The point here is that we must meet people where they are.
Related: Decentralization versus Centralization: Where is the Future? Experts respond
The future is accessible to everyone
Cryptocurrency is a massive financial education project. Take, for example, the subprime crisis in 2007. The problem was not that complicated derivatives tools, such as sections or CMO, they were inherently wrong, it was the fact that there was no transparency or audibility of the products being sold. The invisible risks resided in the system that no one knew existed and then collapsed. With cryptocurrencies, the entire financial set is completely transparent and auditable in real time. By necessity, people learn about margin systems, loan systems, and other traditional and complex concepts that were not otherwise attractive or available to them.
Centralized crypto exchanges know that anyone can learn, audit and move 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. The exchanges must do the right thing on the part of the user, so that they do not go elsewhere. In a DEX, this is a glaring gap in accountability. If something goes wrong, who is behind to help fix the mess?
This is especially important considering that, according to a report by crypto research firm Messari, DeFi protocols have lost around $ 284.9 million for hacks and other exploit attacks since 2019. Right now, the decentralized insurance industry only covers a fraction of the total locked value (TVL) in DeFi, which represents the sum of all assets deposited in the protocols DeFi that earn rewards, interest, new coins and tokens, fixed income, etc.
With new DeFi hacks popping up in crypto in what feels like every other day, centralized exchanges or custodians that can offer greater peace of mind through insurance and counterparty risk are the smoothest access ramps for the industry.
Decentralization is the ultimate goal
Of course, decentralization is the end goal. Ideally, users control their own assets. Directionally, this is where the industry is heading, but we can't ask users to step in before the technology is ready at their expense. The onus is on technologists to get decentralized technologies where they need to be in the first place. DEXs conceivably hold great promise for the future of derivatives trading, but not at the cost of security, speed, and availability for everyone.
This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when 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 expert, founder and angel investor obsessed with reinventing money and finance. As an early cryptocurrency investor and founding partner of the blockchain investment group Taureon, Tom has seen it all from the booms and busts to the massive challenges users face when trying to use cryptocurrencies as electronic cash. As a co-founder of DeFi Nation and a former co-founder of Mosendo, Tom brings his immense knowledge of decentralization to the world of crypto derivatives.
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