With decentralized finance (Defi) being the hype of 2020, it would seem that many of the big centralized exchanges are seems to be FOMO-ing into it. Exchanges are now trying to reposition themselves as integral parts of this booming sector, especially when traders from China are increasingly more interested in Defi.
Centralized exchanges’ aggressive moves into the rapidly growing DeFi space suggest decentralization may be their inevitable path for survival in a crypto trading landscape where decentralized exchanges (DEX) are stealing greater market share. Binance, the world’s largest cryptocurrency exchange by trading volume, last week announced a new integration of its centralized platform, Binance.com, and its decentralized public blockchain, Binance Smart Chain (BSC). There’s a $100 million fund to encourage developers to build DeFi projects on BSC after the company’s last take on DeFi, Binance Dex — a decentralized exchange launched a year and a half ago — generated little traction.
Binance, OKEx, and Huobi, the three centralized exchanges making some of the biggest splashes in DeFi, are also among the most popular exchanges with Chinese users, with deep roots in China, where interest in DeFi has been on an upswing.
The first steps of the Huobi-backed Global DeFi Alliance, according to a press statement by Sharlyn Wu, chief investment officer at Huobi, will be to host a series of events that will help “educate Asian users of various DeFi protocols.”
“These will be opportunities for Alliance members to collaborate with other branches within the Huobi ecosystem to bootstrap use interest in Asia,” Wu said.
Huobi’s DeFi initiative has included some of the biggest DeFi players including Compound, Curve, Aave, Balancer, and Maker Foundation.
The sudden boom in Defi are not only affecting CEX. Even Decentralized exchanges (DEX) are affected, and in fact, are growing faster than their centralized counterparts.
The recent phenomenon of “yield farming” — where users get token rewards for participating in DeFi systems — has made it easier for traders to maximize returns, as CoinDesk reported previously. In August alone, DEXs represented 5% of total crypto exchange volumes, as AMMs like Uniswap, Curve and Balancer accounted for over 90% of total DEX volume, according to a Sept. 14 report by the cryptocurrency-analysis firm Messari.“As DeFi continues to grow, the centralized exchanges will end up acting like a white-label,” Three Arrows Capital’s Zhu said. “Centralized exchanges (would be) a gateway to DeFi, but not where users ultimately spend their time.”
Binance’s Zhao, meanwhile, offered an answer of how his company can survive in a truly decentralized business model: its native token BNB.
“I will be really happy on the day when decentralized exchanges replace centralized exchanges and I think that will push our overall mission forward,” he said during his company’s recent virtual summit. “When that happens, our centralized entity may not be worth much less but BNB will be worth much more. So we don’t lose that much.” Yet, that will require these centralized exchanges to give over control of their operations to the token holders, according to Zhu, in order for their native tokens to become “fully DeFi.”
Babel Finance’s Chen compared the CEXs’ take on DeFi with oil companies buying natural gas companies’ stocks when natural gas first challenged their dominance in the energy sector. The centralized exchanges are in the similar mindset as those oil giants: If DeFi and DEXes replace centralized exchanges, centralized exchanges would still be able to catch some part of that market share, Chen said.
Then again, that depends on whether DeFi survives the current high-risk and high-return craze. For the time being, if not longer, centralized exchanges will still likely dominate the crypto trading market.
“I know for sure most of the DeFi projects will fail. It’s just a matter of fact,” Zhao said. “(But) I don’t think DeFi will fail as an industry. A small number of projects will be hugely successful in the future.”