This is the latest effort by Coinbase Global Inc. (COIN) to diversify away from its spot-trading business by launching a future product. It’s up against a lot of other things.
According to research company PitchBook, the biggest crypto exchange in the United States paid $330 million in February for a U.S.-regulated derivatives exchange named FairX, which relaunched this week with a new emphasis on cryptocurrency. Before they can sell them directly, however, they need regulatory clearance before they can offer a “nano bitcoin” futures contract to the public. Bitcoin is an example of an underlying asset that may be used as the basis for derivatives, which enables traders to wager on the price of the asset.
Coinbase is in desperate need of a new income stream. In the second quarter, Oppenheimer analyst Owen Lau estimated that trading volume, which is mainly spot trading, was down by around 30 percent from the first quarter. That’s despite its widely publicized introduction of an NFT exchange.
Since the crypto selloff started in November, Coinbase’s first few quarters as a public company have been tremendously successful. It announced a $429.7 million loss in the first quarter of 2022, or $1.98 per share, and stated that people were leaving. There was no response from Coinbase to a request for a statement.
However, the derivatives market is very competitive. The derivatives market is dominated by rival crypto exchanges like Binance, Bybit, and OKX, as well as conventional exchanges like CME.
Decentralized exchanges, a subset of crypto exchanges, are also growing in prominence in the derivatives market. Trades may be made directly without the need for a third-party middleman thanks to decentralized exchanges (DEXes).
Much of this activity occurs offshore and is generally uncontrolled.
Throughout the last several years, decentralized exchanges have been rapidly gaining market share. According to research company Chainalysis, “on-chain” trade volume (trading settled directly on a blockchain) now accounts for 55%of all “on-chain” trading activity, compared to just 45% for centralized exchanges.
This isn’t a fair comparison since controlled exchanges like Coinbase and Binance process the majority of their transactions “off-chain,” or away from the public network. The size and scope of centralized exchanges continue to dwarf those of decentralized ones.
With bitcoin and other cryptocurrencies now experiencing a downturn due to their price decline, the emergence of decentralized exchanges indicates that there is growing competition among the many trading platforms.
It’s hard to tell the difference between decentralized and centralized exchanges by looking at the surface. Brokering transactions, matching orders, and carrying out and settling transactions are the primary functions of central crypto exchanges. They serve as the essential go-between, and as such, any mishaps are directly attributable to them.
Since they don’t operate as middlemen between buyers and sellers, decentralized exchanges aren’t doing anything to help deals go through from start to finish. Software automation handles all of those tasks. There is a lot of “liquidity pooling” among users to guarantee that deals are completed.
There is no legal liability for these exchanges, even if they were formed by the corporations themselves. According to the Uniswap terms of service, “We are not responsible for any of these variables or risks, do not own or manage the protocol, and cannot be held accountable for any consequent damages.”
According to Antonio Juliano, CEO of dYdX Trading Inc., which built the second-largest derivatives exchange, dYdX, derivatives make up around two-thirds of decentralized exchanges’ overall volume.
Mr. Juliano believes that in the future, decentralized exchanges will be able to compete with centralized exchanges for every form of trading, primarily since derivatives are the most popular transaction in the crypto market.
In an interview, he added, “We’re beginning to think about new goods.” “It takes time to create that type of material.”