The collapse of FTX and the Luna ecosystem, have shaken every sector of the crypto world, including exchanges, which have seen themselves reevaluate the priorities they need to show to the public and the key factors for defining themselves as trustworthy, secure and transparent.
The turmoil witnessed last year has given exchanges a way to prepare for this 2023. A report by CryptoCompare analyzed various exchanges in depth, giving insight into what to expect in the coming year from these exchange platforms.
Factors influencing the priorities of crypto exchanges
The priorities of crypto exchanges have changed throughout the course of the year, never before have such events affected every sector of the market so much as last year.
The collapse of Luna/Terra in May underscored the need for robust and sustainable systems, particularly in decentralized finance (DeFi).
One factor not to be underestimated as a factor when we talk about changes in exchanges and the trading system is the macroeconomic one.
Rising inflation and interest rates have markedly changed the trading system and the way people invest.
The transition from bull market to bear market in the past two years has changed the ways of investing. In fact, trading volume on centralized exchanges decreased by 46.2% in 2022.
Binance remains the market leader with an exchange volume market share of 56.8% in 2022.
Liquidity metrics are another factor that shows whether an exchange is healthy or not.
While volume provides insight into the level of trading activity taking place on a crypto exchange, liquidity can tell us more about the efficiency of operation and order structure.
During the catastrophic events of the failed exchange FTX, liquidity experienced sharp spikes in volatility.
In November last year, the average daily market depth dropped from $38.6 million in October to $28.2 million.
Trivial, but most important is the factor that should never be missing from an exchange-that of platform security. A common theme of 2022 was the wide range of hacks in the industry.
The lack of thorough security affected both centralized and decentralized exchanges: Crypto.com was hacked in January 2022 for a total reported loss of $33.7 million; Deribit also fell victim to a $28 million exploit.
More recently, FTX was drained of $477 million after the exchange filed for bankruptcy.
Transparency has become the main factor for a crypto exchange
As we have discussed before, the factor of transparency has now become paramount in the cryptocurrency world.
First and foremost, a cryptocurrency exchange must show itself transparent to its audience; its customers must be certain where they are investing their money.
So, in 2023 there will be the so-called “race for transparency” and to prevail over the others, it will be the clearest cryptocurrency exchange, which is to say, the one that will show the most information about its reserves, its debts/credits, and the money it has.
In 2022, mainly at the end, following the collapse of FTX there have already been attempts by some exchanges to seek transparency through the release of Proof of Reserve (PoR).
However, many of these Proof of Reserve lacked the basic principles that a PoR should follow. They were not entirely clear, lacking ongoing verification, not including all assets, and not sharing all the necessary information (cold wallet, hot wallet, third-party liabilities).
So 2023 will be a year when other Proof of Reserve (PoR) will be released, but to be considered as such, they will have to have all the necessary requirements to be considered as such.
So it is a foregone conclusion to explain that exchanges with a clear, accurate, and verified Proof of Reserve (PoR) model will be successful, and obviously the volumes of exchange reserves will be much smaller (which may scare off some users).
What are some positive things we can derive from the events of 2022?
As far as cryptocurrency exchanges are concerned, the events of 2022 have led to an adaptive position for exchanges. Reassessing what factors are important to stay alive in the market, especially a bear market.
A good exchange to be successful in 2023 must show itself: solid, sustainable, with a good liquidity ratio, safe from any hacker attacks, must have the trading opportunity suited to market trends, and above all must be transparent. Important that the Proof of Reserve shows itself to be clear, accurate and verified.
2022 was a difficult year full of negative surprises, 2023 will open the door to change, to a clearer, more transparent and secure future, starting with cryptocurrency exchanges.