The landscape of crypto exchanges never stops changing
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Do you recall the state of crypto exchanges back in 2017? I entered the crypto space at that time, and crypto exchanges were entirely different from what they are today. They offered a bad user experience, had poor website engines, lacked mobile applications, and had almost no investment products or trusted methods to buy crypto.
Blockchain market in 2017 | Source: CB Insights
Looking at it from today’s perspective, the experience with cryptocurrency exchanges in those years was extremely clunky. And, let’s not even start talking about the capabilities of the first generation of decentralized exchanges (DEXs).
Two bull run cycles have passed, and now we see a completely different picture. As Bob Dylan aptly put it, “The Times They Are a-Changin”—and in the crypto space, this change happens very quickly. We now have a significantly altered crypto exchange landscape, and I want to delve into its current development in this article.
Shifting dynamics of centralized exchanges
We had the most challenging and transformative year for centralized crypto exchanges, starting with the FTX collapse. I believe it can only be compared to the infamous Mt.Gox crash. As a result, I can identify three main trends that are reshaping the CEX landscape now.
The first one is a direct outcome of the FTX collapse and represents a significant shift in the crypto exchange industry toward greater transparency—proof-of-reserves audits. These audits aim to ensure that centralized exchanges are holding their clients’ funds in full. This means that CEXs must provide proof to depositors and the public that their deposits match their balances. Independent third parties conduct these audits to eliminate the possibility of reserve data falsification, and now anyone can access proof-of-reserves audits to confirm whether a crypto exchange holds the complete reserves of users’ funds.
After the FTX collapse, proof-of-reserves audits have become essential as they enable users to verify that the balances they hold on a CEX are backed by assets. Moreover, they encourage businesses to adhere to transparency standards, making it more challenging for them to engage in doubtful activities, and ultimately enhancing their trustworthiness.
The second trend is reshuffling the top list of top CEXs itself, with Binance gradually losing its leadership position. Just a year ago, its leadership was unquestioned. However, in 2023, Binance saw its spot market share decrease for seven consecutive months and now holds only 34% of the market. Binance has faced numerous accusations of varying degrees of validity, legal challenges in several jurisdictions, and has been forced to leave some jurisdictions or close some of its products, such as the Binance Card.
Nevertheless, while Binance loses its ground, nature abhors a vacuum. We can also witness the rise of the market share of other CEXs and DEXs, as users shift slightly towards them. The most crucial factor for the future success of any exchange would be compliance with clear and elaborate regulations. This is the third important factor changing the crypto exchange landscape now.
This year we witnessed regulatory tightening in most jurisdictions. Sometimes it’s so hard that crypto firms are forced to decide whether it’s better to leave these jurisdictions (just like the recent big discussion about the US) or even to stop operating there, like it’s happened in the UK.
Ultimately, the future for CEXs is very uncertain. The crypto community is extremely wary of any regulatory initiatives in any country or region. There are only a few jurisdictions that can be referred to as a safe regulatory haven for CEXs right now. What’s even more intriguing is that even the recently adopted MiCA regulation would only take effect in late 2024 or even later, which would still leave enough room for uncertainty in the CEX industry. In this climate, adaptability and resilience will be paramount for survival.
Decentralized exchange surge
Decentralized exchanges have emerged as alternatives to the challenges presented by centralized exchanges, such as centralization itself, vulnerabilities to hacks, mandatory KYC verifications, and control over private keys. The initial generations of such exchanges, like IDEX or EtherDelta, had poor user experiences and limited liquidity.
A revolutionary shift in the defi landscape occurred in November 2018 when the Uniswap exchange implemented the automated market maker (AMM) model for the first time. This model was initially outlined by Ethereum’s co-founder, Vitalik Buterin back in 2017, and now the vast majority of DEXs have since adopted this model. AMM technology offers lower fees, greater accessibility, and faster transaction speeds.
The last two years have been highly successful for DEXs in implementing new technologies, as they turned towards the adoption of order book models and decentralized derivative functionality. The evolution of decentralized services also involved cross-chain technologies like bridges and atomic swaps. It enabled DEXes to offer their services on multiple blockchains simultaneously. It was quite interesting for me to observe how different crypto services adopted similar solutions, with DEXs implementing cross-chain functionality and cross-chain bridges evolving into DEXs, ultimately turning all of them into multi-chain decentralized exchanges.
Uniswap remains the leader among DEXs, and as the leader, it reflects the sentiment in the crypto space. From my perspective, there are primarily two key aspects to consider. The first one has raised some doubts within the crypto community: a feature allowing customization of the KYC verification procedure was discovered in the repository of the fourth version of the decentralized exchange Uniswap. The community viewed this as a potential risk of centralization, though this feature could be specific to liquidity providers and useful for projects needing to comply with regulatory requirements in specific jurisdictions.
Another noteworthy change is that Uniswap introduced swap commissions of 0.15%, which also received mixed reactions. Some individuals perceived this measure as a step away from decentralization. However, I believe it reflects the true state of the crypto bear market, as projects seek new sources of income. I think you may have noticed a very similar trend when many cross-chain services gradually raised their fees, as they were no longer willing to cover the costs of users’ swaps. That’s why the price of a swap on such services has become quite the same now.
The pivotal juncture
This year could potentially mark the end of the ongoing bear market, but the current state of the crypto exchanges is unlike anything we’ve seen in crypto history. Prior to the recent ETF crypto price spike, we witnessed the lowest recorded market trading volume. For now, centralized crypto exchanges are facing their most challenging times, while decentralized exchanges boast the most advanced technology.
Amid this unique crypto market situation, centralized and decentralized exchanges stand at a critical juncture. Their future is shaped by still ongoing regulation debates and technological progress. Uncertainty shrouds what lies ahead, and the pivotal skill for everyone in this ever-changing crypto exchange landscape is the ability to adapt to these changes.
