An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.
Let's stay on the DeFi topic. Here's a very well written article by Haseeb Qureshi: Unbundling Uniswap: The Future of On-Chain Market Making.
This article will give you an overview of the DEX (decentralised exchange) market sector, including the pros and cons when compared to a CEX (centralised exchange).
I agree with most of Qureshi's arguments, especially regarding the attractiveness of DEX vs CEX for retail users. One statement in his report simply nails it:
"People won’t trade on DeFi because it’s 'truly decentralized', or because they prefer non-custodial trading, or any of that crap. They’ll do it because they’re lazy."
In my opinion, however, he is underestimating (or downplaying) the regulatory hurdles/issues involved. Yes, some market making shops or OTC desks do not care and are not bound to any regulatory guidelines since they are not regulated themselves. But for any regulated market maker at an OTC desk, it will be very difficult, or (in my view) impossible to add liquidity and profit to this market sector.
We recently had a brief discussion at our trading desk about the added value use case of normal retail clients employing DEX. With the very easy to use DEX liquidity aggregators and the 1-click browser add-ins, e.g. Metamask, you can log in to your computer and buy any small token that is out there. And the price will be fair.
But when we started to look more into the details of how this flow would start, we identified the following issues:
- To buy a small token on a DEX you need to have "another" token to sell against it. If you are brand new to crypto you will need to have a "bridge" between fiat and crypto somewhere. This will either be a bank, a CEX, or some payment processor/provider via a credit card.
- In case you want to switch back into fiat at some point, you will need to use one of those "bridges". But now, the regulatory hurdles start to come up. The coins you trade in the DEX environment might be tainted. It is highly likely that your crypto-friendly bank will not accept them. There is even a chance that one of your CEXs will not accept them (as they move deeper into the regulatory space).
So, the risk you take as a retail customer in crypto by being lazy and by using the DEX environment is that you might not be able to transfer your assets back into your traditional financial system. This example also points out that the DEX environment is potentially "one large money laundering" machine" - I'm aware that I might get a few negative comments from you hardcore decentralised folk our there... but so be it.
It is for the reasons above that I do not think it will that easy for DEXs to take over a great deal of liquidity from CEXs. The regulatory barriers will prevent a totally free flow of liquidity between the two "universes".