Centralized exchanges are major money makers. They also are inherently flawed, requiring trust that is often betrayed. Couple this with the vulnerability and we can see why people are searching for an alternative.
Peer-to-peer transactions showed their power over the last couple decades. When it comes to this model, there is no counter.
Consider the days of Napster and what the uproar that caused. The problem with that company was its centralization.
Obviously, many debate the validity of file sharing. With Napster, there were infringements on copyright laws. However, even though the company was taken down, file sharing still persists.
In other words, when sharing information in a peer-to-peer manner, there is no way to stop it. The illegal sharing of music, video, and software is still commonplace through this mechanism.
We can move this one step further to financial transactions.
Here is where decentralized exchanges (DEX) enter.
In the crypto world, names such as Celsius, BlockFi, and FTX still strike a chord with people. These were highly successful centralized crypto exchanges that went belly up. The losses were staggering.
We saw their vulnerabilities on full display. Of course, there were some extreme factors in certain cases, something that goes counter to trust. This was the lesson from the earlier days of crypto.
Unfortunately, it is still present in the traditional financial system. We have to trust the companies that run out brokerage accounts. Do we really own our stocks, bonds or other assets? The answer is technically no.
Over the years, we did see implosions in this realm also. Bear Stearns and Lehman Brothers were two examples. These were major Wall Street banks that went belly up, seemingly overnight.
Decentralized Finance (DeFi) got off to a rocky start.
DeFi 1.0 also saw an implosion. There were a lot of scams, rugpulls, and a host of other nefarious activities that caused the "crash" a few years back.
It seems we are embarking upon DeFi 2.0 now. Things are much improved and the numbers are beginning to show it.
From a numbers standpoint alone, Q2 saw the top 10 DEXs in the market facilitating $876 billion in spot trades (up 25% from the previous quarter). In contrast, CEXs saw their spot volumes decline 28% to $3.9 trillion, pushing the volume ratio between the two to a record low of 0.23 in Q2.
It is very interesting to see that DEX are on the rise and CEX on the decline.
This is only the beginning. We are looking at a future where other protocols will be rolled out. Collateralized lending on decentralized exchanges is another area expected to grow.
DeFi’s resurgence can be attributed to the growth of trading. Lending protocols, for instance, have eclipsed their centralized peers, recording a meteoric 959% jump in activity since the late-2022 bottom. Aave now holds enough deposits to rank among the 40 largest banks in the United States, a testament to the growing scale and credibility of DeFi.
Seeing Aave holding enough deposits to break into the Top 40 in the US is a major statement. Of course, this is centralizing things a bit but that is only temporary. With decentralized platforms, the duplication could spread greatly. This means that we could see thousands of these types of service providers built over the next few years.
The tokenization of everything is underway. We are moving in the direction of all assets being traded via tokens. While institutions will roll them out in a centralized manner, we could see many others offered on decentralized systems.
This means that we could see stocks and bonds being traded via DEX on Ethereum and other blockchains.
It would only further the shift away from CEX.
