Blockchain technology will eventually establish a trusted framework for the exchange of value, effectively decentralizing power and financial control. This vision represents a revolutionary paradigm shift that we should wholeheartedly embrace.
However, certain factors can hinder this bright future, including the zero-sum nature of the derivatives market. Crypto needs continued adoption and capital injection to increase its value – the psychological tendencies that tend to encourage fear of running out (FOMO) and over-trading.
Money itself is not inherently valuable, but rather a vehicle for value. Therefore, the cryptocurrency market is a zero-sum derivatives market where individuals trade against each other based on different expectations of the value it represents rather than the actual value itself. .
Zero-sum nature of the derivatives market
A zero-sum game is a situation where any gain made by one participant comes at the expense of another participant’s loss. In derivatives markets, options and futures are considered zero-sum because the contracts represent agreements between two parties, and if one trader loses, the wealth is transferred to another trader.
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The zero-sum nature can create a highly competitive and speculative environment in which traders focus on short-term gains rather than the underlying value and potential of cryptocurrencies. Therefore, it distracts from the ultimate goal of decentralization and building a strong and reliable framework for the exchange of value.
Need for adoption and capital injection
For a cryptocurrency to increase in value, more individuals and businesses need to use and invest in that cryptocurrency. The greater the adoption and capital inflow, the more stable and valuable the cryptocurrency can become. However, as cryptocurrencies grow in popularity and value, users tend to turn to centralized exchanges (CEXs) due to their efficiency, reliability, and more user-friendly interfaces. .
Additionally, the reliance on continuous adoption and capital injection can create a cycle in which the value of cryptocurrencies is primarily determined by speculative trading and market sentiment rather than underlying technological advancements. . This dynamic can lead to an unstable market environment and hamper the development of an open and resilient financial system based on decentralized principles.
The lure of making quick profits from crypto trading is hard to resist, and this collective willingness to trade often translates into a flow of capital to exchanges that facilitate these transactions and charge fees in the form of crypto- currencies with a limited supply. This presents a dilemma: cryptocurrencies were intended to dismantle centralized power structures, but the pursuit of profit attracts users to the most reliable and efficient CEX platforms, and these platforms constantly attract more customers. ‘users, accumulate more wealth through fees, and then become more centralized and powerful. .
So why do we still need CEX?
CEXs play a vital role in the journey towards achieving a truly decentralized ecosystem. They act as a crucial bridge between traditional financial systems and the emerging world of cryptocurrencies. By refining their operations and implementing a robust security infrastructure, CEXs not only facilitate the seamless transition to decentralized finance, but also actively promote its widespread adoption.
One of the primary benefits of CEXs is their ability to provide liquidity and foster market depth within the cryptocurrency ecosystem. They create an active market where traders can efficiently buy and sell digital assets. With a sufficient number of buyers and sellers, CEXs reduce price volatility and enable fair price discovery, ultimately contributing to the stability and growth of the crypto market.
Another key reason is that they serve as an important entry point for newcomers to the crypto space. Their user-friendly interfaces and intuitive trading tools make it easier for people with limited technical knowledge to navigate the complexities of cryptocurrency trading. By providing a familiar environment similar to traditional financial platforms, CEXs lower barriers to entry and appeal to a wider user base.
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Several other factors contribute to the need for CEX, including their effective risk management measures, round-the-clock support services, and convenient on-ramps, among others.
While the goal of the cryptocurrency industry and blockchain technology is decentralization, it is essential to recognize the indispensable role of centralized exchanges in this journey. As the industry continues to evolve and innovate, balancing decentralization with the need for centralized exchanges becomes crucial to achieving a sustainable, inclusive and decentralized future.
It is our responsibility to approach this delicate balance with caution and to avoid any tendency towards forced expansionism. Let us always remember the age-old wisdom that power corrupts and absolute power corrupts absolutely.
Hao Yang has been Head of Options at Bybit since 2021. He previously provided consulting services for OKEx Options. Previously, he worked as a quantitative analyst modeling energy options with exotic payout structures at energy company PZEM and as a trader at Optiver, where he focused on interest rates and index options. . Hao started his crypto journey as a miner before creating the trading system for a crypto exchange startup. He holds a master’s degree in finance from the Duisenberg specialist program of the Vrije Universiteit Amsterdam in quantitative risk management.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.