​“Wait out the storm.” Traders switch to decentralized exchanges after FTX’s collapse

The collapse of FTX, until recently considered one of the most reliable crypto exchanges, affected user attitudes toward centralized trading platforms. Analytical services record cryptocurrency outflows from exchanges, while decentralized platforms show record trading volumes, and their native tokens are growing in price.

On November 14, Uniswap came in second in terms of daily trading volume in Ethereum (ETH), behind only Binance. The figure exceeded a billion dollars in 24 hours, while the volume of pairs with ETH and USDT or USD on centralized exchanges (CEX) was below that mark.

In the following days, the number of transactions with the USDC stablecoin on decentralized exchanges (DEX) reached an all-time high. “Uniswap are likely in a good position from all of this [what is happening with FTX] to gain a lot more users,” a spokesperson for analytics service Nansen wrote on Twitter, commenting on the record figures.

DEX trades for USDC at an all time highUniswap are likely in a good position from all of this to gain a lot more users pic.twitter.com/2AsX8wLooa — Nansen Intern 🧭 (@nansen_intern) November 14, 2022

Due to the growth of trading volume on Uniswap, smart contracts on both of its versions burned more than 2300 ETH worth of gas during the week, momentarily making Ethereum deflationary. According to Coin Metrics, at least 120 000 BTC and 1,4 million ETH were withdrawn from traditional crypto exchanges in the past week.

Many other investors are responding by removing their funds from exchanges entirely. Across the exchanges that Coin Metrics tracks, at least 120K BTC and 1.4M ETH have flown out of exchanges over the past week. pic.twitter.com/LVtlUpzsxx — CoinMetrics.io (@coinmetrics) November 15, 2022

The native token of the decentralized exchange dYdX joined the list of cryptocurrenciesthat rose in price after the FTX bankruptcy, along with tokens of crypto wallets. DYDX hit a price high of $2,78 on November 14, with a 133% increase in price over five days. Experts of analytics company Santiment also called the situation around FTX the reason for the growth.

It is too early to talk about the trend of user migration to decentralized exchanges, says Nikita Zuborev, senior analyst at Bestchange.ru. “If we talk about the aspect of trust, the collapse of FTX certainly reminded many of all the negative aspects of centralization, so trust in CEXs has decreased again. But distrust in something doesn’t help trust in its alternative,” Zuborev specifies, answering a question about whether decentralized exchanges will become more reliable in the eyes of crypto market participants. According to him, growth of trust may be observed after many months of active trading on new platforms, but not earlier.

The situation with FTX rather increased the distrust to the centralized exchanges, TTM Academy CEO Stanislav Pankov agrees. “This is the predictable behavior of people. If a bank goes bankrupt, clients start pulling money out of other banks and keeping it elsewhere. A precedent emerged, because of which people decided to find alternative ways to store and use cryptocurrencies,” the expert draws an analogy.

According to Alexander Peresichan, founder of Technobit and Satoshi Spirit, the departure of users from centralized exchanges does not necessarily imply the transition to decentralized platforms. Users have options to withdraw cryptocurrencies to third-party and hardware wallets, which have significantly increased sales in the past week, or, for example, to place coins in DeFi protocols.

How DEXs differ

Traditional crypto exchanges have the most intuitive interface, often simple ways to buy and sell cryptocurrencies for fiat currencies, Zuborev notes. “But their main disadvantage is that users abandon all the principles of cryptocurrencies for their convenience, no autonomy, and anonymity,” explains the analyst.

On DEXs, it is possible to trade only tokenized assets, most of the trading pairs are secured by synthetic tokens, and the transfer between blockchains is technologically complex and requires third-party trust. All transactions are either written to the blockchain or go through second-tier solutions, which also implies a partial rejection of blockchain benefits and requires trust in third-party protocols.

According to Zuborev, there is little difference for the average user other than the breadth of assortment and the way assets are stored. The interfaces of most DEXs, as well as the integration with wallets, are getting simpler as Web 3.0 evolves, so almost any CEX user can figure it out.

Anonymity and asset control, according to Pankov, are also the strengths of decentralized platforms. The representative of TTM Academy also adds the variety of available cryptocurrencies, as well as staking and farming pools, to their list of advantages.

“As strange as it might sound, however, a centralized body has higher security: there is less risk of hacking, there is tech support, and there is a lower chance of getting into a fraudulent smart contract. On CEX, only CEX itself can steal assets,” Pankov reasons, comparing the two types of trading platforms. That said, if you have sufficient security knowledge, using DEX will be just as safe, the expert specifies. Among other advantages of traditional crypto exchanges, he names the possibility of trading cryptocurrency for fiat money, ease of use, and wider trading opportunities.

What comes next

“To be accepted by the masses, in our opinion, DEXs lack convenience and the fact that everything is in one place. The DeFi market is huge and diverse, the average user without knowledge can’t cope with it,” Pankov reasons. The more people understand the crypto market and have practical skills in working with cryptocurrencies, the closer will be the adoption of cryptocurrencies by the masses, the expert believes.

According to Zuborev, most of all decentralized exchanges lack work with fiat currencies. According to him, it could be partially solved by tying a maximally automated p2p gateway by analogy with centralized exchanges. Without a solution to this issue, it is likely that decentralized services will remain “a gimmick for geeks,” the Bestchange.ru analyst believes.

“For the masses to accept DEXs, there is a lack of order execution speed, which is the classic understanding of liquidity: how fast I can sell an asset at the market price,” adds Peresichan.

According to him, in general, the collapse of FTX did push users to decentralized exchanges, but since those still lack the user-friendly interface and lack liquidity that traditional exchanges have, many coins will remain in third-party wallets waiting for a new bull cycle. “Right now, many investors prefer to slow down trading and wait out the storm,” the head of Technobit sums up.