A new report from the World Federation of Exchanges (WFE) sheds light on the current makeup of cryptocurrency trading platforms, highlighting that 40% of them are decentralized.
It is worth noting that tThe report’s findings primarily shed light on the dynamics between centralized and decentralized trading platforms and the behavior of retail and institutional investors in general.
Centralized VS Centralized Decentralization: The Current State of Cryptocurrency Trading Platforms
The WFE report highlights a related challenge: differences in investor protection awareness among retail investors.
Of the many platforms available, WFE found that 60% of them use a central limit order book (CLOB), similar to traditional regulated trading platforms.
This suggests that even in digital currency transactions, many platforms favor traditional mechanisms, indicating a preference for familiar transaction structures.
Despite the potential advantages of distributed ledger technology, many platforms choose to run off-chain for important operations such as price oracles, order execution, and quote display.
The main use of blockchain appears to be for settlement and custody, allowing traders to sidestep interaction with distributed ledger technology, thereby reducing transaction costs. Such platforms mainly use blockchain for compensation and belong to centralized exchanges (CEX).
Retail vs. Retail Establishment: Different Needs and Awareness
Retail demand for crypto-related products and services has outpaced institutional players. However, institutional entities have shown genuine interest in cryptocurrency custody services, the report said.
This dichotomy highlights the differing needs and understandings of the two investor groups. The report’s findings are alarming, suggesting that retail clients may not be as aware of investor protections as institutional clients.
In the area of liquidity and trading activity, the report shows that while decentralized platforms may offer more attractive transaction fees, centralized exchanges appear to be leading the way.
An interesting finding of the report concerns price differences for the same trading pair on different platforms. This discrepancy presents an arbitrage opportunity for discerning traders, but also points to a potential inefficiency within the cryptocurrency market ecosystem.
The report also noted the need for a robust regulatory framework through the implementation of findings from know-your-customer (KYC) mechanisms.
The report’s findings reveal that centralized and decentralized platforms are not fully compliant with these regulations, mainly due to the lack of consistent global cryptocurrency regulation, with a clear divide.
Featured image via iStock, chart via TradingView
