Is China’s Crypto Ban a Boon for Decentralization?
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Banks and payment gateways must also stop providing services to cryptocurrency exchanges in China. However, Beijing’s new regulations only affect centralized exchanges (CEX)i.e. platforms controlled by a single entity or company like Binance, Huobi or KuCoin.
Decentralized Exchanges (DEX), or those platforms without a single controlling entity, continue to trade.
For years, crypto enthusiasts have touted the benefits of decentralization, especially censorship resistance, distributed governance, and shared profits, while keeping their holdings on CEXs.
In 2017, Bancor launched the very first ‘Automated Market Maker’ and, with it, set a vision for the future of decentralized commerce and liquidity provision. Shortly after this platform went live, analysts began to speculate that DEXs would soon be going to go past centralized exchanges in terms of transaction volume.
However, the early years of decentralized trading were hampered by a lack of liquidity and a significant slippage in trading even popular assets like Ethereum. This meant that the large order books and enticing liquidity of CEXs were too appealing for traders to jump into DeFi.
All of that changed in the ‘DeFi summer’ of 2020 when hundreds of millions of dollars piled up in DEXs like Uniswap and Bancor, often exceeding the liquidity seen on centralized platforms. DEX trading volume has grown steadily since, but recent events suggest that more users and trading volume will soon find their way to DEX.
On Friday, September 24, 2021, The People’s Bank of China (PBOC) declared that all cryptocurrency transactions are “illegal financial activities”, adding that the crypto industry “seriously endangers the security of people’s property.”which exercises regulatory oversight over one of the world’s largest cryptocurrency markets
The news predictably sparked a panic sell-off in Bitcoin, but soon after, investors turned their attention to decentralized assets.especially DEX tokens in anticipation of an increase in DEX trade following the China ban.
The rapid change in sentiment could mark a turning point for cryptocurrency pioneers who portray decentralization as the future of finance.
Since the end of last week, decentralized trading protocols have started seeing dramatic increases in trading activity. dYdX, for example, recorded $ 4.3 billion in transactions volume over the 24-hour period September 26-27, 2021, edging Coinbase by 15%.
The biggest DEXs are now ready to welcome fleets of new crypto users looking to bypass Chinese regulations. Investors outside of China, noting the rapid change in traditional trading in recent days, have clearly seized the opportunity.
Uniswapthe UNI token climbed 32% on Friday’s news, while its little cousin Sushiwap increased by 20%. Uniswap is now flirting with a breakout from its four-week average, while BNT Bancornative token of rose nearly 10% and has seen considerable strength since Friday, looking poised for a major breakthrough. This contrasts with the centralized Huobi platform, once popular in China, which fell 40% last week.
Meanwhile, Bancor has revealed its intention to launch a new version of its protocol, Bancor V3. While the specific features of its V3 have not yet been announced, the developers have indicated that the new version will introduce a new mechanism to maximize the returns of liquidity providers and increase the volume of transactions on the network.
Bancor innovated in 2020 with the unique solution to allow users to earn a return on volatile tokens without the risk of “impermanent loss”a thorn among the roses for DeFi users. With the long-awaited release of the V3 on the horizon, a surge in BNT prices is not out of the question.
Other native DEX tokens to watch out for in the coming weeks include those from Curve (CRV), a popular place to trade and bet stable coins, 1 inch (1 INCH), the main DEX aggregator and 0x (ZRX). For its part, Curve has seen an increase in business following its expansion to Ethereum Layer 2 scaling solutions and competing Layer 1 blockchains like Avalanche and Fantom.
Will the Chinese repression finally stimulate the long-awaited centralized-decentralized turnaround? The success of dYdX over the past few days, coupled with the rapid build-up of DEX assets, suggests that traditional crypto trading may undergo its biggest overhaul to date.
Simon Hammerschlag is a technology and financial advisor working at the forefront of fintech and cryptocurrency. He is co-founder of HAT Partners (Hammerschlag, Alter and Tulsen), an organization that helps clients based in Asia navigate and invest in new technologies.
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