Bitcoin’s rise to $15,900 stole the spotlight from DeFi tokens and decentralized exchanges, but things could change quickly.
Bitcoin’s expected upward spike and the recent wave of corporate and institutional investors allocating a significant portion of their reserves to Bitcoin Code are signs that the pace of crypto currency integration is accelerating rapidly: but does the road to mass adoption have a cost in terms of privacy and decentralization?
Know your customer and anti-money laundering laws have forced most cryptomoney exchanges to be more transparent about who their users are, and those who refuse have had to limit the jurisdictions in which they can offer services.
To operate legally in many countries, many exchanges have had no choice but to comply with strict AML procedures and, apart from Monero (XMR), privacy coin sectors have been removed from most major exchanges.
Recently, regulators have begun cracking the whip and jurisdictions around the world continue to propagate new measures to ensure that investors disclose their holdings of cryptosystems and pay taxes on their profits.
And all this is happening when the U.S. Department of Justice arrested the co-founder of BitMEX and the CFTC accused its owners of running an illegal crypto-derivative exchange.
About a week later, the Financial Conduct Authority, the UK’s main regulatory body, went so far as to ban investors from trading in derivatives on all crypto currency exchanges.
All of these maneuvers are designed to force compliance from crypto service providers, and while they may eventually help promote mass adoption, many crypto ideologues are looking for alternatives to push for financial self-sovereignty.
Reminder for crypto exchanges: KYC compliance can be a competitive advantage
Decentralized exchanges can be the solution
A growing number of investors feel that centralized cryptomoney exchanges operate in essentially the same way as traditional banks. In response, decentralized exchanges such as Uniswap, 1inch, Curve Finance, and Balancer grew in popularity throughout 2020.
For more sophisticated investors, decentralized exchanges offering derivatives trading are also available. Like traditional derivatives, the crypto-currency exchanges that offer the service essentially act as the broker, but the process is slightly different in the decentralized exchanges. This is because they use smart contracts rather than a broker, and the derivative contracts are settled when the terms of the contract are met.
At the moment, Synthetix is one of the most popular decentralized derivatives exchanges, and in 2020, saw its total blocked value increase to $1 billion before a sharp industry-wide correction led to a drop in the total blocked value (TVL) and daily active users in most DEX markets.
Total blocked value on Synthetix.
The exchange allows users to create a synthetic asset tool called „Synth“ that can track gold, fiat currencies and crypto currencies. It also allows the creation of assets that track the price of assets in reverse.
Users of the platform can also wager the native SNX token as collateral for coining new synths and, like Uniswap, those who provide liquidity are rewarded by earning a share of the exchange’s transaction fees.
The IRS is offering a $625,000 reward to anyone who can crack Monero and Lightning Network
Those familiar with DEX as Uniswap will know that literally anyone can list a new asset, which, in the case of derivatives, means that any underlying asset can be transformed into a derivative instrument.
These platforms allow users to trade derivatives without the need to deposit funds on any centralized platform, and are not required to complete any KYC procedures.
While some investors avoid KYC and tax compliance, this is a serious issue for KYC service providers. According to Molly Wintermute, an anonymous developer credited with founding Hegic DEX, compliance is more of an issue for centralized cryptomoney service providers, not DEX.