Centralized Exchange Blowups Have Limited Impact on DeFi

As Binance mulls an acquisition of FTX, the harrowing events surrounding the potential bailout of Sam Bankman-Fried’s exchange by rival CEO Changpeng (CZ) Zhao has dampened sentiment within the crypto community. But there’s a bright spot: DeFi exchange volumes are surging.

Customers of FTX.com don’t yet know if or when they will have access to their funds, and prices of cryptoassets across the board have broken down to new yearly lows.

Alameda Research, the Bankman-Fried founded trading firm has deleted its website, adding to the dour outlook.

In an interview with Blockworks, Bobby Ong, COO and co-founder of CoinGecko said that the industry is still in the process of determining what the exposure of decentralized finance (DeFi) protocols to Alameda Research may be.

It is still uncertain if we are looking at another Three Arrows Capital (3AC) situation, where firms will have to liquidate significant positions, likely at a loss, in a frenzied scramble for liquidity, he said.

“Just as we have seen from the 3AC fall-out, these liquidations may also have spillover effects on other tokens — for example, the price of solana (SOL) has already suffered in the last few days,” Ong said.

The Solana connection

Bankman-Fried was an early investor in Solana, and had been some of the biggest investors for projects in the ecosystem. At the time of writing, the price of SOL sits at $14.30, down about 40% from the day before.

Not only does FTX have the Solana exposure they have to offload but they also led the series A round for both Aptos and Sui…

— Tom Dunleavy (@dunleavy89) November 8, 2022

According to Blockworks research analyst Dan Smith, the tanking prices of Solana are only just the beginning.

“More pain is on the horizon as 57.6 [million] SOL will unstake and become fully liquid at roughly 3AM ET. $675 million SOL leaving the network impairs both the SOL price and the network security. For those looking to sell, there will be a race to exit these positions,” Smith said.

Smith added, “the cost of corruption, or the amount of dollars needed to take control of a PoS network, also takes a material hit.”

Traders turn to DeFi exchanges

There is, however, a silver lining to all the unfolding chaos.

Ryan Rasmussen, a crypto research analyst at Bitwise told Blockworks, “Regardless of where the unwinding ends, it’s the same takeaway as it was back then: DeFi is more robust, transparent, and scalable than CeFi.”

“While the impact of FTX’s insolvency and the sell-off we are seeing today will prolong the bear market, at least events like this spotlight the trade-offs that users make when they choose centralized services over decentralized ones,” he said.

“It’s a harsh — and expensive — lesson, but it’s essential. That’s a long-term positive for DeFi,” Rasmussen said.

This sentiment is shared by Calanthia Mei, co-founder of Masa Finance, a decentralized identity protocol. Mei told Blockworks that ultimately, the events that have transpired have really shown the importance of transparency.

The turmoil in centralized exchanges has reinforced the crypto ethos of “not your keys, not your coins” and sent traders to seek out decentralized alternatives like Uniswap.

While this has been a sad few days for the industry, it appears we are finally learning our lesson about the failures of centralized systems. Uniswap, a decentralized exchange that does not take custody of your assets, is seeing a surge in trading volume since the incident #DeFi pic.twitter.com/Gm7qoYod3W

— Jack W (@jackwardcv) November 9, 2022

Bankman-Fried has previously touted the transparency of his exchange in testimony before the US House of Representatives, and specifically praised FTX’s “24/7 risk engine,” which supposedly represented an improvement over traditional finance.

“If you think about how the entire drama unfolded, it’s about the murky relationship between FTX and Alameda Research in the first place,” Mei said. “I am confident that DeFi protocols — that are mostly collateralized — will be able to retrieve money from Alameda.”

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