A recent report released by Nansen has revealed a series of trends that are having a direct impact on the growth and future development of centralized exchanges in 2023. The report looks at the CEX landscape post-FTX and evaluates major centralized exchanges based on their trading volume, transparency of reserves, functions, and legal areas.
Shift to financial solvency and security
The research reveals that the collapse of FTX has undermined confidence in centralized entities. The collapse has resulted in users demanding increased transparency and enhanced protection measures for their deposits from centralized exchanges. Many leading exchanges have responded by focusing on increasing transparency and security.
One of the key developments has been the push towards offering Proof of Reserves. Proof of Reserves enables users to gain visibility into the exchange holdings and balances, bringing transparency to what was largely an opaque area among many exchanges. The protection fund, on the other hand, is a dedicated repository of funds that acts as insurance against exchange hacks or other unforeseen circumstances. To date, two of the largest exchanges — Binance and Bitget — have disclosed the wallet addresses for their protection fund. Additionally, the platforms have increased their protection fund from $735 million to $1 billion, and $200 million to $300 million respectively.
Trading volumes decrease
Trading volumes have decreased since the collapse of FTX. The drop is being attributed to three major factors, according to the report. The first factor is the general downtrending market.. Another is the loss of trust in centralized exchanges that have led to investors utilizing decentralized exchanges more often. The last is the increased regulatory pressure on exchanges. Kraken and Bybit are the top two exchanges that have seen an increase in spot trading volume. On the derivatives trading front, Bitget is the only centralized crypto exchange covered in the report that has remained unaffected throughout the year, with average trading volumes growing by 4.85% from $194 million to $204 million.
A history of security becomes more important
Another important trend Nansen highlight is the exchange’s track record, which serves as proof of legitimacy and proper security measure implementation. The persistent threat of hacks across the crypto industry is a major factor that spreads both fear and uncertainty among both existing and potential investors. The majority of CEXs have experienced a hack in their lifetime with some never fully recovering their market share. Over $2.85 billion has been lost to hacks since 2012. Since FTX’s collapse, no top exchange has been hacked directly. However, CEXs remain vulnerable to hacks, making strong risk management and having a protection fund more important than ever to ensure customers do not suffer losses in unforeseen circumstances.
New product trends, deals, and offerings
Exchanges are increasingly expected to contribute to the broader crypto ecosystem. One example provided in the report is Bitget, highlighting its acquisition of the BitKeep Wallet in March of 2023 which has ~8 million users. Similarly, other major exchanges like Coinbase and Binance, have been making significant efforts to expand their offerings with in-house features, complete with Web3 entry tools, reserve funds, and more. The Bitget exchange has also been at the forefront of implementing copy trading alongside rivals OKX and Bybit.
The number of listed assets gives users variety in terms of asset selection and trading options. The presence of launchpads and hosting of IEO, or Initial Exchange Offering events – the successor to the Initial Token Offering phenomenon, act as important magnets for users seeking unique opportunities and crypto gems.
Future prospects
The document from Nansen concludes by stating that the legal requirements, which have been under significant scrutiny since the collapse of FTX, accountability, and KYC requirements, are imposing new challenges on CEXs. The report makes it clear that only exchanges that manage to combine user experience and functionality in harmony will have a chance of surviving in the increasingly demanding landscape of the evolving crypto industry.
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