Initially, cryptocurrencies and the entire crypto community came up trying to repeal and replace the conventional fiat currency system. However, crypto exchanges are gradually looking more and more like banks. The exchanges must reinvent themselves to become more than mere trading venues if they want to source more customers.
Letting Users Have Their Way
In 2019, the rise of Decentralized finance (DeFi) championed a new category of investment in the crypto sector. All that happened as a result of an intensified search for yield in the cryptocurrency native money markets. Not all users want to use complicated dApps or run a browser wallet to access lending markets like dYdX and Compound.
Crypto exchanges now can open themselves up to more services. This new development will most likely enable the companies to attract new customers and enhance their position with their current users.
Lending markets let users earn money passively while maintaining their capital in Stablecoins. Thus, it eliminates the exposure to unwanted volatility which is synonymous with the wider crypto market. The new proxy savings accounts allow traders to earn yield while on the sidelines waiting for a perfect opportunity to pounce on the market.
Margin lending is already available on many of these exchanges. Nonetheless, the rates are significantly low to attract any meaningful capital. Launching money markets where the users can lend and borrow crypto is a major step in the right direction. However, to get a true savings account experience, crypto exchanges consider implementing something resembling the DAI Savings Rate that is offered by Maker.
Recently, Coinbase unveiled a similar product that let users deposit USDC in a temporary savings account. Dharma is a functional dApp that operates like a savings account on top of the Compound. Thus, crypto exchanges can develop a similar interface to give their users smooth access to yields.
Value-Added Crypto Exchange Services
Dealing with taxes is a complex venture for crypto investors. Thus, it is another chance for the crypto exchanges to come in strongly and set up an extra revenue source. This opportunity is similar to the monthly invoices that are sent by the traditional financial market brokers to their clients.
Tax management and accounting would become quite easy for regular investors who would no longer require to log all their trades manually. The opportunities in the world of taxation include other activities like offering advice regarding the harvesting of losses to minimize taxable gains.
Most of the crypto exchanges joined private networks to enhance payment finality for Bitcoin. Hence, customers can move their funds at a quicker pace without needing to pay high fees for their transactions to get confirmed in the next block. Although some of the solutions that came up like Liquid have not gained meaningful traction, the product was integrated across big exchanges like Bitfinex, BitMEX, and Huobi.
The Lightning Network promised a similar strategy. However, its proposition comes with many more possibilities as the adoption of the protocol keeps growing. It appears reasonable to expect that this being the most widely accepted solution might come from a non-competing entity that has no exchange services. That would be similar to how SWIFT was developed as a bank agnostic solution.
In that context, it is evident that the cryptocurrency exchanges are on the verge of a major paradigm shift. This shift will ensure that they further solidify themselves as an essential component of the crypto ecosystem. Nevertheless, the way exchanges see and approach the proposed changes will be important in determining who dominates the market in the next several years.
Last year, some of the leading crypto exchanges formed alliances with state-backed entities. For instance, Huobi joined a group of Chinese telecom players last December to become members of the popular blockchain consortium Blockchain Services Network (BSN) that is state-backed. The BSN is an industry alliance that was initiated by the State Information Center(SIC).
China has taken a positive stance towards blockchain but it still insists that crypto activities are still illegal within its jurisdiction. Through blockchain, China aims to develop smart cities that are expected to drive part of its economy in the coming days.
With crypto exchanges joining such initiatives, they might find a soft spot among regulators and authorities opposed to crypto activities. Hence, a middle ground can be reached to enable the platforms to thrive at any place with minimal restrictions since they will be open for scrutiny and viable regulations.
As governments and regulators dive deep and explore the advantages of blockchain, crypto exchanges will have a chance to operate freely and introduce new products to new markets.