Whether the politicians currently talking tough about the latest crypto crisis agree or not, crypto is not dead (yet). Or at least the crypto that exists outside of a certain three-letter centralized crypto exchange isn’t dead yet.
Along with a tough lesson for many, the collapse of FTX also presents an interesting question for DeFi (which some claim is the only one genuine crypto things that currently exist): What would crypto look like without exchanges?
First, let’s unpack the component parts, or rather the consumer services, that the average crypto exchange offers.
First and foremost, it allows people to exchange theirs Bitcoin to Ethereumtheir Cardano to Solana, and any multitude of incompatible cryptocurrencies for each other. It does this for one very reasonable price.
Trades on exchanges are executed quickly, without too many worries about congestion and so on. It’s not perfect though, with a lot of downtime throughout their stories.
Finally, and perhaps most importantly, they make it very easy to connect your bank account to the crypto markets, giving traders convenient entry and exit points to withdraw their chips from the table (or double down).
In a nutshell, we talk about interoperability, scalability and onboarding. And don’t forget: they’re usually designed to be friendly to crypto newbies.
IN DeFi worldthere are some green shoots, but the sector has a long way to go before it can really compete in the same arenas and the onboarding of newcomers.
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Interoperability has had a brutal 2022. Some of the biggest hacks that happened this year were carried out on bridge services. Badger DAO suffered a $120 million exploit via its Bitcoin-to-DeFi bridge, Wormhole fell to a $326 million attack on its cross-chain bridge, and PolyNetwork lost $611 million for similar reasons.
Not all bridges are built equal, and so there is certainly hope that a robust design will emerge. Hop Protocol is one such example, but it is limited to Ethereum, Gnosis and layer-2 solutions. Synapse is another popular cross-chain protocol that connects layer-1 and layer-2 network. Of course, these are just examples, and a bridge is only as reliable as its last attack.
Alternatively, THORchain also works with cross-chain exchanges that utilize a slightly different design.
Still, it’s currently nowhere near as easy to trade in non-compliant assets DeFi as it is on a centralized exchange. And for the normies in the audience, it’s going to remain a big problem.
Do it fast
Layer-2 solutions are going to play a key role in helping non-custodial markets emerge for the masses. It’s quiet around crypto these days, and gas fees are at record lows, but don’t forget: with every bull market or disaster, those fees go up by the ton.
The chart below shows average gas charges since this time last year. As the bull market decreased, these fees were also reduced. But can you guess when Terra imploded?
Fortunately, tier-2 adoption is happening in a big way.
Measured across values such as how many users move from Ethereum to these solutions and how many transactions occur, the market is growing rapidly.
There are over 516,000 different addresses that have moved funds to zkSync, for example. The largest total amount moved between Ethereum to Arbitrum has been 2.08 million ETH, according to Dune Analytics.
The chart below makes this trend a little clearer. If layer-2 solutions were almost non-existent this time last year, users are doing far more transactions on Optimism and Arbitrum than ever before. And it is only necessary to measure two of the market’s products.
Show me the money
The final component here is being able to do some of these actions without needing a trusted intermediary.
Yes, many are lucky to have access to affordable banking services from the start, but removing the exchange from bank-to-exchange-to-smart-the contract equation is a key step in a world where stock markets can implode seemingly overnight.
Consider Uniswap’s recent fiat launch on the ramp. Now, when you move to the decentralized exchange, you can choose to use a bank transfer, credit or debit card to buy crypto. Once purchased, the crypto is sent directly to a non-custodial wallet of your choice, be it a Ledger hardware solution or your browser wallet.
The solution, powered by MoonPay, is also available on layer-2 networks such as Optimism and Arbitrum, so you can also go directly to the fast layers.
Bottom line: next year will offer tons of business opportunities for crafty entrepreneurs who find unique ways to tackle each of these problems — or more than one of them at once.
As former Netscape CEO Jim Barksdale said, “There are only two ways to make money in business: bundling and unbundling.”
Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay before it goes on the page. Subscribe here.
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