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The Pros and Cons of Decentralized Exchanges for Financial Institutions

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Decentralized Exchanges (DEXs) have been one of the main drivers of decentralized finance (DeFi), thus raising considerable interest from institutional investors. But as DEXs strongly differ from traditional trading venues, financial institutions should be aware of the opportunities and risks involved.

Decentralized finance (DeFi) is one of the biggest success stories in the digital asset space, all but killing the refrain that blockchain technology was a “solution in search of a problem,” After finding an initial home on Ethereum, developments in interoperability and scalability on other platforms have enabled the segment to attract close to $175 billion in locked-in funds, up from under $10 billion a year ago. Additionally, DeFi is now drawing in significant sums in venture capital.

Although virtually every new initiative claims to be offering something different, the majority of DeFi’s growth has been driven by two main segments – lending pools and decentralized exchanges (DEX). The latter has undergone several iterations over the years, but the embedded model is broadly based on the ideas pioneered by exchanges such as Uniswap and Bancor.

What exactly is a DEX?

In a nutshell, a DEX connects sellers and buyers and automatically calculates exchange rates and fees based on supply and demand. Rather than buyers and sellers being matched through an order book like on a centralized exchange, smart contracts perform all trades. DEXs like Uniswap typically operate by means of liquidity pools comprising a pair of tokens. Such a liquidity pool might contain Bitcoin (BTC) and a US-dollar stablecoin like Tether (USDT), for example.

In return for providing liquidity to the pool by “locking in” assets, users often referred to as “yield farmers” earn a share of the transaction fees paid by traders who use it to swap tokens. Yields adjust according to the relative scarcity of assets in the pool. Returning to the previous pair for instance, if the volume of USDT were running low, the yield would automatically increase to incentivize users to provide more liquidity. The goal is to create a decentralized and automated trading system. Other exchanges like Balancer operate multi-token pools, whereas Curve Finance focuses on stablecoin arbitrage.

While much of the growth in DEX usage has been driven by the retail segment, there is increasing evidence of institutional interest in the space, according to a recent report from Chainalysis. However, DEXs are a very different proposition from their centralized counterparts and come with a unique set of opportunities and challenges for institutional players.

The advantages of DEXs over centralized exchanges

Firstly, their open and permissionless nature means that DEXs can list an extraordinarily large array of tokens, as anyone can launch their own liquidity pools. At one point in 2020, Coindesk reported that Uniswap had added over a thousand new token pairs in a single week. Therefore, DEXs give early investors the ability to start trading with sufficient liquidity before a token becomes listed on a centralized exchange. Furthermore, as all activity on a DEX is governed by the underlying smart contracts, traders do not have to give up custody of their funds to a third party.

In addition, DEXs can provide higher execution reliability during high volatility events caused by cascading liquidations of derivative positions on centralized exchanges. While CEXs might not be responsive at all for short periods of time due to API overloads, DEX trading remains functional and orders can be reliably executed, although the fees required to complete transactions might drastically increase in the short term (particularly in the case of Ethereum-based transactions).

Risks of using a DEX

Unfortunately, many of the benefits of using a DEX are a double-edged sword, and institutional users, in particular, face certain risks. For one, most of DeFi is currently unregulated and participants typically do not undergo KYC. Anyone can download a wallet such as Metamask and start trading tokens immediately.

The lack of regulation acts as a honeypot for scam token operators launching their own pools, and DEXs have also been implicated in money laundering. For instance, after centralized exchange KuCoin suffered a major hack in late 2020, the culprits used decentralized exchanges to trade nearly $20 million of stolen tokens. The lack of a regulatory compliant legal framework creates an entry barrier for institutions that are forced to act within the confines of licensed secondary markets.

Similarly, slippage and front-running are also common risks on DEXs. Blockchain transactions are not instant, and in the volatile cryptocurrency markets, prices can move in the time it takes for an order to be executed as a confirmed transaction. On-chain trading is also subject to network congestion which may lead to much higher execution fees compared to centralized exchanges.

Besides, due to the open nature of public blockchains, anyone can view the pool of transactions waiting to be confirmed. Front-runners set up bots to scan the pool for potentially profitable arbitrage trades, and when they spot one, they immediately make the same transaction, but for a higher fee, making it more attractive for a miner to pick out of the queue. Many DEXs and platforms have taken steps to combat this risk, but it remains a persistent problem.

Further, the transparency of the smart contract code underlying DeFi protocols allows anyone to view it, but that also means anyone can find and exploit code bugs and vulnerabilities. As such, smart contract risk is a persistent problem for the DeFi sector, resulting in a proliferation of dedicated DeFi insurance pools, such as Nexus Mutual or Opium Insurance, which offer coverage for smart contract risk. It is also becoming more common for projects to use code auditing services from established cybersecurity consulting firms like CertiK or Kaspersky, as well as pay generous bug bounties to white-hat developers.

A challenging, but improving user experience

Beyond the risk element, institutions may also find that the DEX user experience lacks in several areas.

Although it is theoretically possible to trade any tokens, only the largest pools have sufficient depth of liquidity for large trades. DeFi exists entirely separately from the traditional financial system, so there is no way to get started on a DEX using fiat currencies. Instead, the user must first obtain crypto using a centralized service before they can participate in DeFi.

DEXs also necessitate self-custody, whereas many institutions may prefer to use a custody provider for digital assets. At the outset of the DeFi wave, user interfaces often tended to be an afterthought for developers who were more focused on smart contract code. This is evidenced by the user interface of services like Curve Finance which still has the look and feel of a DOS computer program of the 1980s.

In addition, DEXs tended not to offer the range of order types, charting tools, or technical indicators found on many of their centralized counterparts. However, this is rapidly changing. The more recent emergence of DEXs like dYdX and Perp offer decentralized, self-custodial spot and derivatives trading combined with a user interface similar to a CEX. This shows that decentralization does not necessarily need to come at the expense of features and user experience.

Decentralized exchanges have made huge advances in recent years, growing from a niche concept to accumulate billions of dollars in locked-in assets. While institutions are rightly intrigued by the concept and some are keen to capitalize on the transformative potential of DEXs, they should be aware of the regulatory and operational challenges involved.

Source: AlgoTrader

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Source: https://www.cryptoninjas.net/2021/10/14/the-pros-and-cons-of-decentralized-exchanges-for-financial-institutions/

Blockchain

Why Nigeria Has The Highest Percentage In Bitcoin Usage In The World

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Nigeria Bitcoin Community

Twitter CEO Jack Dorsey posted that Nigeria is one of the world’s largest users of cryptocurrencies.

We are talking about the percentage of the country’s residents who are actively using digital finance to the total number of citizens.

In Nigeria, that percentage is 32%!

They use it in shopping, making les paris sportifs au Senegal on popular sports, investing and mining.

According to the analytics platform Statista, Nigeria does rank first among countries whose residents use bitcoin.

In second place are residents of Vietnam (21%), followed by the Philippines with 20%.

Also on the list of countries where Bitcoin (BTC) is popular are Turkey, Peru, Switzerland, India, China, the United States, Germany, and Japan.

Perhaps Nigeria’s leadership is due to the fact that the country’s authorities — for example, Nigeria’s Vice President Yemi Osinbajo — have repeatedly stated their support for cryptocurrency.

In his tweet about bitcoin being popular in Nigeria, Jack Dorsey mentioned writer Samantha Messing.

She published an open letter titled “Why Progressives Should Love Bitcoin.”

In this letter, it was noted that any Nigerians’ interest in cryptocurrencies is primarily due to the deplorable state of the country’s financial industry and the peculiarities of the local population.

“Nigeria’s population is one of the youngest in the world,” the letter’s author notes, suggesting that it is youth and flexibility that allows Nigerians to be as progressive as possible in order to appreciate the new opportunities that Bitcoin gives them.

Samantha Messing evidently wants as many people as possible to learn about Bitcoin, so she tries to popularize digital gold in every possible way.

In her letter, the author even published several links to educational programs concerning Bitcoin, because she wants people to really understand it.

As the Nigerian naira falls in value, bitcoin is becoming a real lifesaver for the population.

The figure of 32% of the country’s population owning bitcoins is, indeed, the highest percentage in the world.

The popularity of cryptocurrencies in Nigeria is also confirmed by other data, such as the fact that in 2020, remittances to Nigeria exceeded $17 billion and a significant portion of that amount was transferred in cryptocurrency.

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Source: https://medium.com/nigeriabitcoincommunity/why-nigeria-has-the-highest-percentage-in-bitcoin-usage-in-the-world-cf06d9788263?source=rss——cryptocurrency-5

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Bitcoin non è una moda, lo dice il CEO di Morgan Stanley.

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Conio Team

Fonte: Cryptonomist

Il CEO di Morgan Stanley, James Gorman, ha affermato che Bitcoin non rappresenta solo un’usanza del momento. “Non credo che Bitcoin sia una moda passeggera”, ha detto Gorman la scorsa settimana agli analisti durante l’assemblea sugli utili del terzo trimestre. “Non so quale dovrebbe o non dovrebbe essere il valore di Bitcoin. Ma non andrà via e la tecnologia Blockchain che lo supporta è ovviamente molto reale e potente”.

Gorman ha aggiunto che l’azienda sta fornendo ai clienti l’accesso alle criptovalute attraverso vari fondi, ma non le scambia direttamente per loro. “Stiamo attenti, siamo rispettosi e aspetteremo di vedere come se la caveranno i regolatori”, ha concluso Gorman.

Lo scorso giugno ha inoltre formalizzato la richiesta per la creazione di un nuovo fondo di investimento in Bitcoin, in risposta all’esigenza di clienti istituzionali che volevano esporsi alla criptovaluta. Questi fondi permettono agli investitori di esporsi su Bitcoin senza acquistarlo direttamente, come l’ETF appena approvato negli Stati Uniti.

Morgan Stanley è stata la prima banca a consentire ai clienti l’accesso al settore ai propri clienti. Altre istituzioni affermate, tra cui JPMorgan, Goldman Sachs e Citigroup, stanno cercando di espandere la propria presenza nello spazio delle criptovalute. Goldman consente a determinati clienti di scambiare criptovalute attraverso un prodotto derivato e Citigroup sta cercando di iniziare a negoziare criptovalute attraverso un fondo. JPMorgan invece consente ai clienti di accedere a sei prodotti di investimento in criptovalute.

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Source: https://blog.conio.com/bitcoin-non-%C3%A8-una-moda-lo-dice-il-ceo-di-morgan-stanley-fdc00222e808?source=rss——cryptocurrency-5

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Open DeFi: Risk Management Notification Protocol by Binance, Orbs & Moonstake

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Finally available for DeFi investors from tomorrow onwards, the renowned Defi.org Accelerator – a Joint Venture project co-created by Orbs, Binance and Moonstake – proudly announces the launch of their chain-agnostic Risk Management Notification Protocol for mobile devices.

This unique Open DeFi Notification Protocol comes to life to allow investors and DeFi users to manage their operations in the decentralized finance universe reducing their loss risks to a minimum especially during market volatility.

Open DeFi: Helping DeFi Traders Reduce Risk

The Open DeFi Notification Protocol permits users to set up any number of alerts for different DeFi apps.

Orbs, the public blockchain platform, announced the launch of the Open DeFi Notification Protocol, a key application product especially created to assist users with unlimited free mobile notifications for impactful on-chain events.

This unique Open Notification Protocol was developed within the DeFi.org organization, co-created by the Orbs blockchain platform, Binance crypto exchange and Moonstake crypto wallet provider.

The Defi.org Accelerator was conceived primarily to develop further creative policies and the necessary tools towards the next level of innovation in decentralized finance, by providing liquidity, support and validation within the ever growing DeFi global ecosystem.

The recently announced Open DeFi Notification Protocol publicly available from tomorrow is basically an event-aggregator of contributions from community members that records significant events.

These events include smart contract creations and upgrades, blockchain governance votes, blockchain accumulated pending rewards, cryptocurrency price swings, prominent liquidations, stop losses, and more.

DeFi users like traders or liquidity providers, by accessing this type of data, can better manage their asset portfolios with superior tools to foresee and react to impactful events. The Open DeFi Notification Protocol allows a secure management by risk reduction, unarguably valuable in volatile market periods.

All DeFi projects can choose to differentiate themselves from competition by providing its customers with unlimited free mobile notifications of key sensitive information. All these Defi platforms need to do is integrate with Github for 30 minutes.

Orbs’ co-Founder Tal Kol describes the product in his own words,

“Transparency is a hallmark of blockchain, yet reliable mobile notifications that can aid the DeFi community are virtually nonexistent…our talented team has created a user-friendly protocol that functions almost like a reactive DeFi assistant, alerting users to the possibility of impending liquidations, significant price swings, contract upgrades and the like. We are positive it will make a huge impact.”

Initially the beta version of the Open DeFi Notification Protocol relies on a centralized node for tracking and display of the significant events recorded.

Orbs is working towards the launch of an updated improved version very soon that will rely on the decentralized Orbs network of independent nodes.

The beauty behind this announcement is that users will be able to set up an unlimited number of notifications linked to a variety of DeFiapplications, all of it integrated on a single open-source interfase comprising several dApps architecture frontends.

No previous registration is required, defi users will simply need to download the mobile app “DeFi Notifications” for iOS or Android and further scan their QR address in MetaMask (or the QR position in their app’s UI).

To make it even easier, in the Orbs’ official YouTube channel there is a tutorial video of this new DeFi Notification Protocol working with Sushi as an example.

Tal Kol added,

“The great thing about the Protocol is that it can work with emerging DeFi projects. All that’s required is the implementation of a simple JavaScript web3 class, to extract the notification from the on-chain data. This is then contributed via PR to the Protocol Github repo.”

Orbs Makes Connections Happen

The public blockchain platform Orbs was specifically designed to grant mass DeFi applications the integration with EVM-based L1 and L2 blockchains such as Ethereum, Binance Smart Chain (BSC), Polygon, Solana and Avalanche.

The decentralized Orbs protocol, powered by their ORBS native token, is operated by a public network of permissionless validators upon a PoS (proof-of-stake) consensus.

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Source: https://blockonomi.com/open-defi/

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