Everyone involved in blockchain and cryptocurrencies knows that it is a rapidly evolving space. Since the first Bitcoin was mined in 2009, several developments have led to the formation of what is known today as the Crypto-Industry, one characterized by a 24-hour market, DeFi, and over 2000 cryptocurrencies.
In light of important present-day developments like adoption by institutional investors, stricter crypto-regulations, and new innovations in decentralized finance, many have raised questions about where the market will go from here.
An essay titled Crypto Market Structure 3.0 by Arjun Balaji, Investment Partner at Paradigm, attempted to answer this question by highlighting the current state of the market. According to Balaji,
“We’re in the early stages of the next structural evolution”
Citing the lack of capital efficiency owing to market fragmentation and insufficient industry-wide credit as one of the main issues in crypto-trading today, Balaji said that the convergence of centralized finance and decentralized finance might emerge as a solution.
He noted,
“As DeFi continues to gain structural importance, CeFi and DeFi will converge as they see overlap in market participants, liquidity pools, and product UX.”
One of the most unique features of DeFi is the Automated Market Maker (AMM) model that enables permissionless listings allowing passive liquidity providers to create real market depth before it has inventory. The integration of centralized and decentralized exchanges will enable users of conventional financial markets to harness these features.
CeFi will attempt to capitalize on the attractive on-chain yields provided by decentralized exchanges, and this can be achieved with EVM compatible chains. We have already seen this happening with Binance Smart Chain since it has cross-DeFi mechanisms and increases interoperability.
If institutional investors continue to enter the space, however, we may even see whitelisted KYC’d liquidity pools that are compliant with regulations. As scalability improves, on-chain financial infrastructure will begin competing with centralized infrastructure. Tools like Hashflow are already around to offer a layer 2 protocol to build and operate emerging generations of CeFi-DeFi hybrid exchanges.
Such a DeFi-CeFi bridge is very much a two-way street, however, as can be seen from Bitfinex’s expansion and launch of Tether-settled equity derivatives.
While these developments hold promise and point to an exciting future, there is a considerable amount of systematic risk too since there has been evidence of market manipulation by creating artificial demand for coins on decentralized platforms.
22) But, also, there’s systematic risk.
And it’s big.
See, things don’t *look* super leveraged. Unless you look harder.
Anything that uses aTokens or cTokens blows out if Aave/Compound do.
Anything that uses Uni tokens crashes if *either* side does.
— SBF (@SBF_Alameda) October 2, 2020
Ergo, while Market Structure 3.0 may be the bridge between two worlds coming together, it might still leave this space divided in order to be completely viable.
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