JPMorgan requires continued dominance in centralized crypto exchanges post-FTX

Regardless of the current implosion of centralized cryptocurrency change (CEX) FTX, JPMorgan strategists led by Nikolaos Panigirtzoglou consider such exchanges will proceed to dominate the broader crypto ecosystem as decentralized buying and selling platforms face various hurdles.

First off, decentralized finance (DeFi) protocols rely closely on CEXs to operate correctly and “it could doubtless take a very long time till the middle of the worth discovery course of in crypto market shifts from centralized exchanges to DeFi,” the crew wrote in a current word to shoppers. They added that DEXs aren’t sufficient for big-money traders given their slower transaction speeds or “their buying and selling methods and order dimension to be traceable on the blockchain.”

For (on-chain) DEXs, since every thing may be traced on the blockchain, it is subsequent to not possible to commingle funds with out elevating consideration. That is precisely what FTX (off-chain CEX) reportedly did when it loaned out half of its buyer funds to its sister firm Alameda Analysis in an effort to fund dangerous bets.

Whereas total buying and selling exercise on DEXs appeared to have elevated in current weeks, that early-stage shift is extra doubtless a operate of the deleveraging that adopted FTX’s collapse, the crew defined. Bernstein highlighted this development in a word final week, saying the demise of FTX is placing crypto self-custody, which permits customers to retailer their very own tokens as an alternative of counting on off-chain exchanges, “again in vogue.”

Furthermore, DEX buying and selling volumes for final month hit the very best stage seen since Could, rising to $103.84B in November versus $57.6B in October, knowledge from DeFiLlama confirmed, signaling decreased confidence in CEXs. Galaxy Digital (OTCPK:BRPHF) founder and CEO Mike Novogratz mentioned the FTX mess is a “physique blow” to belief within the crypto business and belief within the system.

However JPMorgan continues to be taking the contrarian view, noting DEX’s absence of restrict order/cease loss performance, good contract threat (hacks and protocol assaults), their want for over-collateralization, and the pooling of belongings into liquidity swimming pools.

“Danger/return tradeoff [is] harder to evaluate in DeFi given the usage of totally different tokens by way of belongings borrowed or lent/collateral posted/obtained curiosity funds and given the overall absence of restrict order/cease loss performance,” the word learn.

Bitcoin (BTC-USD), the world’s largest digital token by market cap, dipped as a lot as 7.3% within the days following FTX submitting for chapter on November 11, although virtually all of these losses had been erased on the time of writing. All in all, nevertheless, the token is was nonetheless down over 70% from its November 2021 peak. See why Looking for Alpha contributor Vincent Ventures thinks the “FTX ache is bitcoin’s achieve.”

Fellow SA contributor Craig Pirrong assessed the DeFi-CeFi debate, saying the FTX downfall doesn’t imply that centralization of crypto buying and selling is essentially flawed, however as an alternative it showcased the “worst manner” to pursue centralization.