The future of digital asset liquidity: Centralized or decentralized?
The cryptocurrency market is growing at an exponential rate. As such, digital assets are starting to become more and more mainstream. While many in the cryptocurrency community are wary of major financial institutions and governments getting involved in digital asset trading, it is happening regardless. Central banks all over the world are starting to set up systems to deal in cryptocurrencies. (One of the most notable cryptocurrency exchanges, Coinbase, has even managed to get a banking license in the United States.) As such, it seems that the decentralized nature of the cryptocurrency market may be coming to an end.
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The cryptocurrency market has seen its share of ups and downs, but it hasn’t slowed down its growth in any way. Even though some may feel that the market is still in its infancy, cryptocurrencies are slowly being accepted in retail for everyday transactions. Bitcoin, the first cryptocurrency ever created, was made in 2009, and the market has come a long way since then. With that being said, there are still a lot of problems that need to be resolved before cryptocurrencies can be used on a daily basis. What are the actual problems facing cryptocurrency?
Even in technology, when money is involved, you’ll find a range of opinions on how the world should work. Take the future of digital asset liquidity for example. If you have been following the crypto-currency space, you know that one of the most talked-about topics lately is whether exchanges should be centralized or decentralized. Centralized exchanges rely on a hub-and-spoke model that allows them to control the flow of money as well as the assets traded. Decentralized exchanges, on the other hand, are peer-to-peer, meaning there’s no middleman. Peer-to-peer exchanges allow trading directly between two people, creating a trustless system that is often hailed as a solution to the issues of centralized exchanges
Bitcoin (BTC) exceeded $60,000 last month, underscoring the current craze for digital currencies. After BTC, altcoins have also seen a significant increase in value. This is all music to the ears of long and short-term bullish investors looking for higher gains, even with the current pullback in bitcoin and support around $40,000. But despite all the hype surrounding the current bull market, the lack of liquidity in digital assets remains a major challenge for exchanges, traders, token issuers and market makers. The reality of the current market is that professional crypto traders cannot effectively access global liquidity or find the best global prices to increase their profits. For token issuers, the current environment means that they are forced to list their tokens on multiple exchanges to reach their target customers. This increases the cost of business development and forces issuers to operate in niche markets. To move the digital currency market forward, these categories must be understood.
Fragmentation and market forces
One of the main reasons for the illiquidity is the fragmentation of the market. The idea behind cryptocurrencies is much more than a sexy stock market investment. Cryptocurrencies are expected to become a whole new way of handling money. But due to the large number of different coins – and even blockbuster coins – and the lack of businesses that accept cryptocurrency payments, users aren’t using cryptocurrencies as they were originally intended. Related: Professional traders need one global crypto, not hundreds of lakes Of course, this was an inevitable consequence of the destruction of the Fiat world. This fragmentation is the only way for consumers to make their way through the world of cryptocurrencies. And since exchanges are generally localized, they usually serve only one or a few fiat currencies. Once again, consumers are left with a fragmented market and a slow adoption curve. This is not a bad situation because users are free to choose, but it has consequences. Two of these consequences are a lack of liquidity and high price volatility. Take a look at the price movement of bitcoin over the past two years. The least we can say is that there have been ups and downs. This instability makes it impossible for a consumer to shop in a state-of-the-art department store with a $500 mobile digital wallet. In a nutshell: Liquidation and price movements become a problem. Moreover, the fragmentation of the market has resulted in a huge learning curve for newcomers in this field. To understand the market and determine the exact prices of the various components, you need various stock accounts and a thorough knowledge of the industry. That’s why many novice digital investors just buy and hold, waiting for the market to change, but hoping for relatively quick returns on coins – even those without a clear use-case. Related: Predicting the price of bitcoin with quantitative models, part 1
Centralizing demons ?
The complexity of a fragmented market has necessitated several decisions. Some propose a centralized approach to liquidity. Thanks to the centralisation of currencies and the standardisation of markets, investors are no longer faced with a fragmented and complex maze of currencies and prices. If there were no such negative fragmentation issues, investors would be more willing to act quickly rather than wait for larger gaps between supply and demand. While this may seem coherent at first glance, such a solution is untenable. First, centralization goes against the idea on the basis of which cryptocurrencies were created. Centralization is not the answer to fix a market that was created by a deliberate rejection of centralized currency. This will displace most of the market. Secondly, if the market adopts a centralised policy, the same problems that banks face (slow processing, lack of transparency and security, high costs) will eventually occur in the digital currency market. The progress once hoped for will only repeat the failure of the current financial system. Finally, investors will have limited opportunities to participate, even in a decentralized system where all market liquidity is effectively centralized in a few decentralized exchanges. With less but more liquidity available, the inevitable result will be a return to a fiat financial system. Related: Decentralization versus centralization : Where is the future? The experts’ response
Since centralized solutions conflict with the nature of digital currencies, a more robust decentralized solution is needed to solve the problems caused by market fragmentation. Decentralisation, while a longer-term solution, can create a market with lasting institutional acceptance. This development is in line with the vision of cryptocurrencies and ultimately leads to stability. However, simple decentralisation is not a sufficient answer. For cryptocurrencies, the key to liquidity is distributed but connected. This slogan takes the best of both worlds and brings them together. Decentralization – distribution – is what makes cryptocurrencies so revolutionary. But in the 21st century, global connectivity is closer than ever, and it will only get stronger. However, this growth in connectivity must be supported by organic methods. Trying to impose a rigid structure on the crypto currency space is obviously tantamount to centralizing it. So investors and traders must weather the storm of fragmentation to protect what makes cryptocurrencies so deeply disruptive. This path provides connectivity, and as connectivity increases, the digital currency market becomes more liquid. Moreover, the more decentralized the market remains, the more the original purpose of digital currencies is preserved. The market is expected to develop in this direction over the next three to five years.
Growth to DeFi
As the cryptocurrency market moves in this direction, activity will only increase, allowing decentralized financial solutions (DeFi) to take their place. DeFi solutions offer the best of both worlds: truly distributed connectivity that protects the digital currency space and reduces market fragmentation. Most cryptocurrency trading companies operate in the same way as a bank or stock exchange, with buyers and sellers having to pay a fee to use it. This practice can quickly develop into a David and Goliath situation, with traders being exploited by wealthier Goliaths with a higher risk threshold. In the DeFi exchange pool, however, the benefits (and costs) are shared equally among all parties. Liquidity providers are rewarded for their contribution to the pool in the form of a pool token. Buyers always have a seller and sellers always have a buyer. In addition, all liquidity providers receive a portion of the trading fee based on the size of their share. This is because it is a decentralized system: Not only can someone contribute cryptocurrency to the DeFi pool, but they can also contribute fiat, allowing traditional and conservative investors to do their part as well. If the investment group sees value, expect them to be there for you for a fee. Of the key catalysts that will push the market in this direction, central bank digital currencies (CBDCs) are the most prominent. When governments start issuing CBDCs, they provide a much easier access point to WiFi. Investors and consumers will already be ready for digital transactions, and the threshold for transferring money from fiat currency to cryptocurrencies will be greatly reduced. Moreover, CBDCs will increase international monetary traffic. Being a useful catalyst for the creation of a fully decentralized liquidity pool would eliminate the need for isolated exchanges trading only in local fiat. Forces like CBDCs and greater DeFi participation will drive change, and investors will benefit more. This article contains no investment advice or recommendations. Any investment or business transaction involves risk, and readers should do their own research before making a decision. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph. Haohan Xu is CEO of Apifiny, a global money and securities transfer network. Prior to joining Apifiny, Haohan was an active investor in the equity markets and a trader in the digital asset markets. Haohan holds a B.S. in Operations Research with a minor in Computer Science from Columbia University.There are many ways that the digital age has changed the way we think about the way we go about our daily lives. We’ve become dependent on technology to a point where we rarely go a few hours without checking our cell phones. However, one area where the digital age has made less of an impact is the way we interact with money. For example, when you go to buy a cup of coffee at a local coffee shop, they don’t offer you the ability to pay using cryptocurrency in the same way that they don’t offer the option to pay using Venmo.. Read more about blockchain pos system and let us know what you think.
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