JPMorgan: CEXs will keep dominance despite FTX

Key points: 

• While acknowledging the recent surge in DEX trading volumes, JPMorgan does not see this as the start of any meaningful long-term trend.
• JPMorgan asserts that CEXs will continue to control the majority of global digital asset trading volume.
• Slower trading speed, asset pools, and order traceability features on DEXs could limit institutional participation. 
• Barriers to widespread acceptance are: lack of limit order/stop-loss functionality, reliance on price oracles to pull data from centralized exchanges, vulnerability to hacking, vulnerability exploits, need for over-collateralization, and systemic risk from automated liquidation cascades. 

Centralized exchanges will continue to control the majority of global digital asset trading volume, JPMorgan said, contradicting some crypto-native experts who expect a tectonic shift to decentralized platforms following the FTX crash.

Slower trading speed, asset pools, and order traceability features on decentralized exchanges (DEXs) could limit institutional participation, strategists at the bank led by Nikolaos Panigirtzoglou wrote in a note to clients on Thursday.

Analysts also point to DEX’s lack of limit order/stop-loss functionality, reliance on price oracles to pull data from centralized exchanges, vulnerability to hacking, vulnerability exploits, need for over-collateralization, and systemic risk from automated liquidation cascades are barriers to widespread acceptance.

“Given the use of different tokens in borrowing assets or interest payments lent/deposited/received, and given the general lack of limit order/stop-loss functionality, it is more difficult to assess the trade-off between risk and reward in DeFi, " pointing to the team's firmness. “Managing, governing, and auditing DeFi protocols without unduly compromising security and centralization is a significant challenge.”

Activity on decentralized exchanges has surged since the bankruptcy of Sam Bankman Fried's centralized exchange FTX, and Defi Lama data shows that trading volume on decentralized platforms soared 68% this month to $97.22 billion, the highest since May. 

Many observers interpreted this as a sign of declining trust in centralized exchanges and the beginning of a long-term shift toward more democratized finance.

CryptoCompare's Hosam Mahmoud said in a report published on November 23:

With users' confidence in CEXs shaken following the collapse of FTX, and the resilience DEXs has shown to the contagion in the market, we expect increased adoption of DEXs in the coming months among market participants

While acknowledging the recent surge in DEX trading volumes, JPMorgan does not see this as the start of any meaningful long-term trend.

“While DEXs have increased their share of overall crypto trading activity over the past few weeks, this is more a reflection of the collapse in crypto prices and deleveraging/automatic liquidation following the FTX crash,” the bank’s analyst team said. "