• Is China’s Crypto Ban Beneficial to Decentralization?

  • Following China’s recent crackdown on cryptocurrency, traditional cryptocurrency exchanges are beginning a rapid withdrawal from one of their most important markets.

    Banks and payment gateways must also stop providing services to Chinese cryptocurrency exchanges. However, Beijing’s new regulations only apply to centralized exchanges (CEXs), or platforms controlled by a single entity or company, such as Binance, Huobi, or KuCoin.

    Decentralized exchanges (DEXs), or platforms that do not have a single controlling entity, continue to trade.

    For years, crypto enthusiasts have extolled the virtues of decentralization, particularly censorship resistance, distributed governance, and shared profits, all while holding their crypto holdings on CEXs.

    Bancor launched the first-ever ‘automated market maker’ in 2017, laying out a vision for the future of decentralized trading and liquidity provision. Analysts began to speculate soon after that platform went live that DEXs would soon overtake centralized exchanges in terms of trading volume.

    However, the early days of decentralized trading were hampered by a lack of liquidity and high slippage on trades involving even popular assets such as Ethereum. This meant that traders were too enticed by CEXs’ large order books and eye-watering liquidity to venture into DeFi.

    This all changed during the 2020 ‘DeFi summer,’ when hundreds of millions of dollars poured into DEXs like Uniswap and Bancor, often outpacing liquidity on centralized platforms. Since then, trading volume on DEXs has steadily increased, but recent events indicate that more users and trading volume will soon find their way to DEXs.

    On Friday, September 24, 2021, the People’s Bank of China (PBOC), which regulates one of the world’s largest cryptocurrency markets, declared that all cryptocurrency transactions are “illegal financial activities,” and that the crypto industry “seriously endangers the safety of people’s assets.”

    The news caused a massive panic sell-off in Bitcoin, but investors quickly shifted their focus to decentralized assets – most notably DEX tokens – in anticipation of a surge in DEX trading following China’s ban.

    The sudden shift in sentiment could be a watershed moment for cryptocurrency pioneers who promote decentralization as the future of finance.

    Decentralized trading protocols have seen dramatic increases in trading activity since the end of last week. For example, dYdX saw $4.3 billion in trading volume over the 24-hour period of September 26-27, 2021, edging out Coinbase by a full 15%.

    The biggest DEXs are now preparing to welcome swarms of new crypto users looking to avoid China’s regulations. Observing the recent rapid shift away from traditional exchanges, investors outside of China have clearly seized the opportunity.

    On Friday’s news, Uniswap’s token UNI rose 32%, while its smaller cousin Sushiswap rose 20%. Uniswap is now flirting with a breakout from its four-week average, while BNT – Bancor’s native token – has increased nearly 10% and has seen significant strength since Friday, positioning itself for a significant breakout. In comparison, the centralized platform Huobi, which was once popular in China, has dropped by 40% in the last week.

    Meanwhile, Bancor has announced plans to launch Bancor V3, a new version of its protocol. While specific features of its V3 have yet to be announced, developers have stated that the new version will include a novel mechanism to maximize liquidity provider returns and increase network trade volume.

    Bancor broke ground in 2020 with a one-of-a-kind solution that allows users to earn yield on volatile tokens while avoiding the risk of ‘impermanent loss’ – a thorn in the side of DeFi users. With the release of the much-anticipated V3 on the horizon, a BNT price increase is not out of the question.

    Curve (CRV), a popular place to trade and stake stablecoins, 1inch (1INCH), the main DEX aggregator, and 0x are some other native DEX tokens to keep an eye on in the coming weeks (ZRX). Curve, for its part, has seen an increase in activity as a result of its expansion to layer 2 Ethereum scaling solutions and competing layer 1 blockchains such as Avalanche and Fantom.

    Will China’s crackdown finally result in the long-awaited centralized-decentralized reversal? The recent success of dYdX, combined with the rapid accumulation of DEX assets, suggests that traditional crypto trading may be undergoing its most significant transformation to date.

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