[Practical Finance] Crypto Investors Shocked by FTX Bankruptcy... Flocking to P2P Exchanges

Interest in Decentralized Exchanges
Peer-to-Peer Trading Without Intermediaries

Growing Distrust in Centralized Exchanges Amid Situations of Unretrieved Virtual Assets

[Asia Economy Reporter Lee Jung-yoon] Since the FTX incident, coin investors' interest has been focused on decentralized exchanges (DEX). FTX, once known as one of the top three global virtual asset exchanges, filed for bankruptcy protection in just a few days. Additionally, issues such as misuse of customer deposits, hacking suspicions, internal accounting control failures, and tangled governance structures emerged. A significant number of investors who entrusted their assets to FTX had to bear losses. For these reasons, decentralized exchanges, which can avoid situations where deposited virtual assets cannot be returned, are receiving renewed attention.

Decentralized exchanges refer to platforms where peer-to-peer (P2P) trading can occur without going through an intermediary or middleman, unlike centralized exchanges (CEX) such as FTX, Coinbase, Bybit, and Binance, the world's largest exchange. Most well-known domestic exchanges like Upbit, Bithumb, Coinone, Korbit, and Gopax fall under centralized exchanges.

Increase in Decentralized Exchange Trading Volume Due to FTX Incident

According to data from virtual asset analytics firm Dune Analytics, the total trading volume of all decentralized exchanges over the past week was $6 billion (approximately 7.845 trillion KRW). The exchange with the highest trading volume in the past week was Uniswap, reaching $3.8509 billion (approximately 5.032 trillion KRW). This was followed by Curve ($695.06 million), DODO ($516.28 million), Balancer ($347.63 million), and SushiSwap ($236.18 million). In terms of market share, Uniswap accounted for about 65% of the total. Curve exceeded 11%. DODO and Balancer recorded figures close to 9% and 6%, respectively.

Notably, the combined trading volume of decentralized exchanges by project last month increased significantly compared to the previous month. While the trading volume for October was around $40 billion, last month it approached $70 billion.

This is interpreted as a result of growing distrust in centralized exchanges following the FTX incident and signs of a chain collapse in the coin market, leading to concerns that deposited virtual assets in exchanges might not be returned. Investors moved from centralized exchanges to decentralized exchanges. As a consequence, Gemini Earn, which pays interest on deposited coins, halted fund repayments. Virtual asset lending company BlockFi filed for bankruptcy.

[Image source=Reuters·Yonhap News]

Kim Min-seung, a researcher at Korbit, said, "When insolvency occurred at FTX, trust issues regarding customer balances managed by centralized exchanges arose, and many users moved to decentralized exchanges, resulting in double-digit growth in user numbers and trading volume in early November." He added, "Binance CEO's statement that they are heavily investing in DeFi (decentralized finance) and Binance's recently expanded virtual asset recovery fund also indicate that significant investments in DeFi will be made next year." He continued, "Now that DeFi is sufficiently mature, it will increase its user base further through a virtuous cycle of growth and investment." DeFi refers to virtual asset-related financial services conducted without central institutions or organizations. Decentralized exchanges, lending, and staking are included in DeFi. Among these, decentralized exchanges are understood to have the largest total deposit scale.

Decentralized exchanges are relatively safe from unfortunate incidents like those suffered by FTX victims, who could not retrieve their deposited virtual assets. This is because P2P trading is possible without administrator intervention. Transactions on decentralized exchanges are conducted via smart contracts. These are systems where contract conditions programmed into electronic contract documents agreed upon in advance are executed once conditions are met. Blockchain-based smart contracts distribute, execute, and verify these contracts through the blockchain. While Bitcoin was limited to storage and transfer, Ethereum was developed as a smart contract platform capable of automatically executing all types of contracts. Bitcoin is referred to as blockchain 1.0, and Ethereum, which implements smart contract functionality, is called 2.0.

Of course, decentralized exchanges do not only have advantages. Since there is no operating entity, it is difficult to resolve issues such as erroneous transactions or fraud. Additionally, because transactions are conducted via blockchain smart contracts, fees may be incurred to pay those participating in blockchain storage and verification. Also, if liquidity participating in decentralized exchanges decreases, transactions may not be completed smoothly, and price volatility tends to be greater than in centralized exchanges.

Decentralized Exchanges Attracting Market Attention

Positive outlooks on decentralized exchanges have poured in following the FTX incident. Especially overseas, decentralized exchanges are gaining attention. Patrick Hillman, Chief Strategy Officer (CSO) of Binance, evaluated, "The virtual asset industry is moving toward DeFi, and it is uncertain whether (centralized) companies will survive in 10 years." Lars Hofmann, a researcher at virtual asset media The Block, said, "Due to the impact of FTX's bankruptcy, investors' trust in centralized trading has weakened," and "there is a high possibility of moving to decentralized exchanges that can be self-managed." Coinbase is also preparing to launch its own decentralized exchange.

A similar phenomenon is occurring domestically. Exchange Gidac plans to launch Gidac DeFi in January next year. A Gidac official said, "Recently, global liquidity has been moving significantly toward the DeFi market and decentralized trading platforms." Gidac DeFi focuses on asset swaps, allowing users to exchange held virtual assets for other virtual assets.

This content was produced with the assistance of AI translation services.