Centralized Exchanges Will Continue to Dominate Crypto, JPMorgan Says

DeFi still relies on CEX for price discovery and is more susceptible to hacks.

Hand with white eye on palm behind crypto coins stack in between palms
  • DeFi is still not in a position to replace centralized players, JPMorgan says
  • Centralized exchanges are still a better option for traders

FTX’s collapse shocked the crypto world. However, many voices within the industry saw the collapse of the centralized crypto exchange as a new opportunity for DeFi (decentralized finance).

With trust in centralized exchanges vanishing, DeFi protocols would become the go-to platforms for digital asset trading. These platforms are trustless, peer-to-peer, transparent, and overcollateralized. This means that they are potentially more robust than centralized exchanges like FTX.

However, analysts have pointed out that DeFi still has some important limitations. Earlier, JPMorgan issued a report acknowledging that the recent string of crypto bankruptcies came from centralized entities.

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Still, Nikolaos Panigirtzoglou, an analyst from the investment bank says that centralized exchanges will likely remain dominant in the foreseeable future.

"We are skeptical of a structural shift away from centralized exchanges (CEX) into decentralized exchanges (DEX)," Panigirtzoglou said.

Most price discovery still occurs on centralized exchanges, and DeFi protocols rely on oracles that obtain price data from them. Moreover, DeFi is still at a greater risk of hacks and exploits. Chainalysis estimates combined losses of $3bn across DeFi in 2022.

DeFi protocols also still have some functional disadvantages, including over-collateralization and a lack of stop-loss functionality. However, Panigirtzoglou pointed out that some DeFi protocols are addressing these concerns.

Traders Still Choose CEX, Despite Risks

A study by ConsenSys shows that 99% of crypto trades still go through centralized exchanges. Most traders still choose to deal with them and their accompanying counter-party risks.

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Managing accounts with multiple exchanges is also an issue, which is why many traders opt for third-party tools that let them trade on all of their accounts from one place.  One of these tools, Coinigy, allows traders to trade on more than 20 platforms from its interface. 

Tools like Coinigy allow traders to access over 5,000 crypto assets and get more advantageous trading conditions for each. Without these tools, traders would have to manage multiple CEX interfaces to find the best trading conditions for multiple assets.  

Despite the limitations of CEX, the drawbacks of DeFi are currently a bigger issue for traders. Critically, slow transaction speeds on DeFi put traders at a disadvantage compared to their counterparts on CEX. 

Moreover, the transparency of transactions on a DeFi protocol is also an issue for traders, Panigirtzoglou explains. Traders don’t want the full record of their trading strategy to be available on the blockchain. 

On the Flipside

  • JPMorgan analysts acknowledge that DeFi is getting better. Further innovation could potentially put it on par with CEX. 

Why You Should Care

Finding the right platform to trade with is, in the long run, one of the most impactful decisions a trader can make.

Read about the biggest hacks in DeFi this year:
Top 5 Hacks That Rocked DeFi in 2022

Learn more about the new DeFi tools out there:
Flash Loans: Groundbreaking DeFi Phenomenon or Tool for Manipulation?

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Alex Costa

Alex Costa is a crypto writer and investor specializing in researching, analyzing and reporting on promising small-cap projects that are gaining traction in the industry. He has been in crypto since 2018, when he began looking for hidden gems in crypto. Today, he is dedicated to finding the next top performing NFTs and tokens.