Crypto exchanges saw record trading volumes across the board in 2021. Centralized Exchanges (CEX) saw trading volume of $14 trillion for the year, jumping 689% from $1.8 trillion in 2020. Decentralized exchanges (DEX) had an even better year, recording a 858 percent increase in trading volume. DEX trading has grown from $115 billion in 2020 to $1 trillion in 2021, with the volume peak in May 2021.
This recent meteoric rise in crypto exchanges is a strong indicator of demand for crypto and digital assets from investors of all types. Unlike public stocks, which are listed on a single exchange or, in rarer circumstances, multiple exchanges, the nature of decentralized assets on Blockchain and DLTs means that anyone can create a technology stack to access them.
This new era of digital financial market infrastructure (dFMI) is more of an evolution for TradFi assets such as equities and debt securities, derivatives and real estate. This is the next phase of dematerialization following a transformation from paper certificates to an electronic format, which in itself has transformed the asset custody market. The shift from certificates in electronic format to smart contracts on DLTs has a similar and often profound impact on how we design dFMI for the next era of highly digital financial services.
The historical note of interest for this stage of maturity is that it all started with an anonymous white paper by someone named Satoshi, and the subsequent development and evolution of markets and infrastructure happened outside of the TradFi sector, mainly capitalized by participation in the retail market.
Also noteworthy is the tour de force that is the crypto and digital asset industry, comprised of highly skilled blockchain and DLT teams combined with former TradFi traders, asset managers, regulators , brothers and sisters of technology – BOOM!
Very fragmented liquidity
An inherent characteristic of Blockchain and DLTs is that liquidity is highly fragmented between platforms. This keeps the ratio of trade to total market cap well below that of TradFi. For example, in 2019, 255 crypto exchanges had about $175 billion worth of cryptocurrencies between them, about $686 million per exchange. By comparison, 60 exchanges held $69 trillion in the global equity market, with $1 trillion per exchange.
In January 2022, the number jumped to 455 crypto exchanges with a total market cap of over $2 trillion. Even if this means that the exchange rate/market capitalization ratio has improved, the gains remain marginal. Indeed, exchange protocols can expand and grow as liquidity locked in individual protocols breaks free from its traditional silos.
Companies such as Terraformer serve as a liquidity stack for startups of all stages and across all asset classes, offering Liquidity-as-a-Service. It deploys white-label solutions to help teams, DAOs, and market makers reduce unlocked circulation to improve token liquidity. Improving liquidity is only part of the stool of a potential solution. The blockchain ecosystem also needs cross-chain liquidity protocols to enable seamless domain-wide exchange of crypto assets.
Swing is a platform for crypto traders and yield producers to access cross-chain liquidity using its decentralized bridge architecture. Viveik V., Founder and CEO of Swing.xyz, believes, “Users will benefit immensely once they start trading on Ethereum, Binance Smart Chain, Polygon, Avalanche and a range of other blockchains. Thus, protocols must design user-friendly solutions to add liquidity to DEXs, lending/borrowing protocols, and participate in cross-chain trading with minimal slippage. Swing claims to provide frictionless liquidity for a range of crypto assets across multiple networks for the entire crypto community.
The community could make even more headway if protocols had the functionality to access the vast pool of fiat liquidity. Achieving this, however, requires better on-ramps for those curious about crypto but discouraged from participating due to market volatility. One company working on this is DeFi Lending Protocol, Pledge financingwhich offers borrowing and lending of crypto and fiat assets at attractive interest rates.
Pledge CEO Tony Y. Chan says: “Many people do not want to be exposed to the volatility of the crypto market, but want the attractive interest rates of crypto. Stablecoins are becoming a lucrative asset class for cautious investors who want to benefit from cross-system cash flow.
Pledge allows investors to lend or borrow stablecoins and fiat currency at fixed interest rates as part of a long-term investment strategy, rather than short-term floating interest.
TradFi players view fragmented liquidity as inefficient and will likely struggle to see the opportunities or benefits of a highly fragmented decentralized ecosystem. Thin markets, fragmented liquidity and transparent transactions work against institutional players who seek not to spread the positions they build and demand best execution on their orders at the time they choose to execute.
TradFi players of all types turn to a range of prime brokers, custodians, OTC facilities and asset managers, to access crypto and digital assets with companies like Genesis, Paradigm, NYDIG, all offering institutional quality services. Goldman has teams up with Galaxy Digital for an OTC crypto installation, a strong signal of the maturity of the crypto and digital asset markets for TradFis.
The Investor Trading Continuum
The crypto trading fraternity includes two main players: investors and traders. In 2021, retail crypto investments increased by 881% so many new investors entered the market. However, many newcomers have been blocked by minimum investment criteria or exorbitant asset management fees imposed by some trading platforms. Crypto trading is a high-risk game, where inexperienced investors can rack up losses quickly, but at the same time, there are traders who have the necessary knowledge and skills but lack the means to use them meaningfully.
In most cases, investors and traders remain at the ends of the trading spectrum, with limited means of communication between them. But the business landscape can flourish better once the brotherhood comes together under a unified business scheme.
Zignaly provides a platform for investors and traders with a unique performance-based profit sharing model to ensure a fair distribution of profits. Bartolome Bordallo, CEO of Zignaly, explains that thanks to integrated digital asset trading protocols, investors can opt for expert-managed trading services. Platforms like Zignaly can direct investments, managed by expert traders, to partner exchanges, unlocking new cash flows.
Although the crypto community benefits from the approaches taken by these trading platforms, most are still unable to provide exposure to a crucial investment opportunity: trading crypto-synthetics.
The need to diversify
The traditional synthetics market has demonstrated enormous growth potential, with $610 trillion notional value in the first half of 2021. The nascent crypto industry has a lot to gain if the community actively embraces trading synthetics. Moreover, as global inflation reached 4.35% in 2021, ordinary investors began to demand other investment options. Commodities and derivatives have emerged as an alternative asset class, with a unique role in an inflation-ridden global economy.
The COVID-19 pandemic has complicated the economic situation as governments have flooded the market with liquidity as part of their national macroeconomic policies. A quarter of all US dollars in circulation were printed in the last year alone, so it’s no surprise that inflation hits its highest level in 39 years in the United States in 2021, with the consumer price index simultaneously registering a strong increase of 7%. This confluence of events has seen consumer savings and interbank lending rates drop to near zero, even in first-world economies, rendering savings accounts and term deposits powerless in the face of rising climate. inflation.
Maintaining a diversified portfolio is a popular method of beating the inflation blues, and opening up wider access to commodity trading can help investors achieve this. However, trading sophisticated financial instruments without the proper knowledge is a complex proposition fraught with barriers to entry and fees.
Protocols like Comdex help to democratize access to financing via synthetics. Enable non-institutional investors to more easily participate in the market. Through its decentralized synthetics exchange, Comdex aims to provide its users with access to commodity price fluctuations, allowing them to effectively create an “all-weather portfolio” ready for whatever 2022 brings. Comdex CEO Abhishek Singh said, “Built on Cosmos with IBC’s interoperability features, the platform facilitates trade in inflation-proof synthetics.”
Although current trading systems have many opportunities for improvement, especially for TradFi balance sheets, protocol developers are already providing a steady stream of solutions to address them. As these enhancements are incorporated into the new dFMI component stack, crypto and digital asset trading will be positioned to reach new heights.
Whether you are a retailer or wholesaler, trader or investor, this year holds great promise for the evolution of the Blockchain and DLT ecosystem for crypto and digital assets of all types. Crypto exchanges may yet become the most important component of this ecosystem, but they will face fierce competition in the network on all fronts.