What would crypto look like without centralized exchanges like FTX?

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Whether politicians are currently talking hard about the latest crypto crisis agreeing on the matter or not, crypto is not (yet) dead. Or at least the crypto that exists outside of a particular centralized three-letter crypto exchange is not dead yet.

As well as a hard lesson for many, the collapse of FTX also presents an interesting question for DeFi (which some say is the only real crypto thing out there right now): what would crypto look like without exchanges?

Let’s start by unpacking the components, or rather the mainstream services, provided by the average crypto exchange.

First, it allows people to trade their Bitcoin for Ethereum, their Cardano for Solana, and any host of incompatible cryptocurrencies for each other. It does this for a very reasonable price.

Trades on the exchanges are executed quickly without too many problems with congestion etc. It’s not perfect, however, with plenty of downtime throughout their history.

Finally, and perhaps most importantly, they make it easier to connect your bank account to the crypto markets, providing traders with convenient on- and off-ramps to get their chips off the table (or double down).

In a nutshell, we were talking about interoperability, scalability and integration. And remember: they are generally designed to be crypto newbie friendly.

In the DeFi world, there are some green shoots, but the sector has to go a very long way before it can really compete in the same arenas and in integrating newcomers.

Asset exchange

Interoperability has had a brutal 2022. Some of the biggest hacks that have happened this year have been on transitional services. Badger DAO suffered a $120 million exploit through its Bitcoin-to-DeFibridge, Wormhole fell to a $326 million attack on its cross-chain bridge, and PolyNetwork lost $611 million for similar reasons.

However, not all bridges are built equally, so there is certainly hope that a robust design will emerge. The Hop protocol is an example, but it is limited to Ethereum, Gnosis and Layer-2 solutions. Synapse is another popular inter-chain protocol that connects Layer 1 and Layer 2 networks. These are just examples, of course, and a bridge is only as reliable as its last attack.

Alternatively, THORchain is also working on cross-chain swaps which take advantage of a slightly different design.

Still, it is currently not as straightforward to trade non-compatible assets in DeFi as it is on a centralized exchange. And for normal people in the public, it’s going to remain a huge problem.

make it lively

Layer 2 solutions are going to play a key role in helping noncustodial markets emerge for the masses. It’s quiet around crypto these days, and gas charges are at all-time highs, but remember: with every bull market or disaster, those charges go up a ton.

The chart below shows the average fuel costs since this time last year. As the bull market waned, these fees also went down. But can you guess when Terra imploded?

Gasoline fees from December 27, 2021 to December 27, 2022. Image: Etherscan.

Fortunately, Layer 2 adoption is happening in a big way.

Measured through values ​​such as the number of users switching from Ethereum to these solutions and the number of ongoing transactions, the market is growing rapidly.

There are over 516,000 different addresses that have transferred funds to zkSync, for example. The largest total amount moved between Ethereum and Arbitrum was 2.08 million ETH, according to Dune Analytics.

The chart below makes this trend a little clearer. While Layer 2 solutions were almost non-existent this time last year, users are transacting far more on Optimism and Arbitrum than ever before. And that only measures two of the products on the market.

Transactions rely on Ethereum, Arbitrum, and Optimism over the past year. Image: Dunes. show me the money

The final element here is being able to perform any of these actions without the need for a trusted intermediary.

Yes, many are blessed with access to reasonable banking services from the start, but removing exchange from the bank-exchange-smart-contracts equation is a key step in a world where exchanges can implode overnight. .

Consider the recent launch of fiat Uniswaps on the ramp. Now, when heading to the decentralized exchange, you can choose to use a wire transfer, credit or debit card to buy crypto. Once purchased, the crypto is sent directly to a non-custodial wallet of your choice, whether it is a Ledger hardware solution or your browser wallet.

The solution, powered by MoonPay, is also available on layer 2 networks like Optimism and Arbitrum, so you can jump straight to those fast layers too.

Bottom Line: The next year will provide tons of business opportunities for astute entrepreneurs who find unique ways to tackle each or several of these problems at the same time.

As former Netscape CEO Jim Barksdale once said, there are only two ways to make money in business: bundling and unbundling.

Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails can read the essay before it is published on the site. Subscribe here.

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