DeFi protocols rely heavily on centralized exchanges to be able to function and it would likely take a long time until price discovery shifts from centralized to decentralized exchanges, JPMorgan said.
Centralized exchanges will continue to control the majority of global digital-asset trading volumes, JPMorgan said, contradicting some crypto-native experts who expect a shift toward decentralized platforms in the wake of FTX's collapse.
Decentralized exchanges' (DEX) slower transaction speeds, pooling of assets and order-traceability features are likely to limit institutional participation, the bank's strategists led by Nikolaos Panigirtzoglou wrote in a note to clients on Thursday.
The analysts also cited the absence of a limit order/stop loss feature on DEXs, their dependency on price oracles that source data from centralized exchanges, vulnerability to hacks, exploits, the need for over-collateralization and systemic risks from the cascade of automated liquidations as hindrances to widespread adoption.
"Risk/return trade-off more difficult to assess in DeFi (decentralized finance) given the use of different tokens in terms of assets borrowed or lent/collateral posted/received interest payments and given the general absence of limit order/stop loss functionality," the team noted. "The management, governance and auditing of DeFi protocols without compromising too much on security and centralization is a big challenge."
Since Sam Bankman-Fried's centralized exchange FTX went bust, activity on decentralized exchanges has picked up, with DefiLlama data showing trading volumes on decentralized platforms up 68% to $97.22 billion this month from October, the highest since May.
Many observers read that as a sign of waning confidence in centralized exchanges and the beginning of a long-lasting shift to democratized finance.
"With users' confidence in [centralized exchanges] shaken following the collapse of FTX, and the resilience DEXs have shown to the contagion in the market, we expect increased adoption of DEXs in the coming months among market participants," CryptoCompare's Hosam Mahmoud said in a report published on Nov. 23.
While acknowledging the recent uptick in DEX trading volume, JPMorgan doesn't think it's the start of any kind of sizable long-term trend.
"While there has been some increase in the share of DEX in overall crypto trading activity in recent weeks, this is more likely to reflect the collapse in crypto prices and the deleveraging/automatic liquidations that followed the FTX collapse," the bank's analyst team said.
