In cryptocurrency circles, few topics have captured the fascination of proponents as much as ETFs, which are supposedly the last obstacle to institutional investors entering the space and causing the market cap to balloon to new all-time highs. Though it is questionable that the buzz surrounding ETFs is the true driving force for institutional interest in crypto.
Serious discussion about institutional adoption can perhaps be traced back to last December, when Bitcoin soared to meteoric highs of nearly $20,000, and futures contracts went live at CME and CBOE. The excitement around these developments was carried over into 2018, and there’s now a new target in sight: the exchange-traded fund, or ETF.
ETFs are considered a lower-risk instrument than their futures precursors. This is because the use of futures is chiefly in high-leverage trades (essentially a bet on the price of the asset on a set expiration date), while ETFs are backed by the underlying asset in question. While it looked unlikely until recently that we would see an ETF in 2018, recent announcements from VanEck (regarding their meeting with the SEC), who previously had an ETF proposal rejected, suggests that approval is imminent.
Irrespective of the outcome, I can’t help but feel like this tunnel vision around ETFs is unproductive. After all, they’re simply one of many tools that can enrich the institutional experience. In fact, I think most participants in this space are overlooking a vastly more significant development: decentralized exchanges, also known as DEXs.
Decentralized exchanges, as the name might suggest, are exchanges that aren’t run by a single party (like the majority of those in existence today). Their topology closely resembles that of any distributed network – instead of omnipotent hubs with satellite nodes, nodes connect with multiple equipotent ones, sharing a synchronised database (much like a blockchain).
With multiple instances of an exchange running simultaneously, the attack surface is vastly reduced because there is no single point of failure to target. Individuals remain in complete control of their private keys, without relinquishing custody of funds to a third party. That is, they maintain custody of their own funds, as opposed to them being held by the exchange, which would be the case for a centralized exchange.
The result of using a decentralized structure for an exchange is no downtime, no disastrous hacks that severely impact the markets (the 2014 Mt Gox breach is widely held to have been the cause of the previous bear market), and greater privacy for users. Other benefits of the proliferation of DEXs would include functionalities such as faster clearance times, access to otherwise unlisted assets, and cross-chain swaps.
ETFs are a valuable addition to the ecosystem, but are somewhat restricted to Bitcoin (and do not truly push investors towards the crypto space in and of itself). Conversely, DEXs provide a much wider range of options, truer to the ideals of self-sovereignty that define the space. Granted, not everyone will make use of decentralized (or even centralized) exchanges, but it’s important to make the option available and as streamlined as possible – even with the recent trend in crypto-custodianship, the DEX option mitigates the risks arising from having one custodian, as opposed to hundreds (or thousands) of users overseeing custody themselves. This level of control is much more appealing to institutional investors, which is why DEXs provide a unique and compelling value to these players.
About the Author
Shidan Gouran is the CEO of Laser, a blockchain protocol offering several dimensions of functionality that will take cryptocurrencies to the next level.