Hotbit Goes to the Wall, Spurring Incredulity Towards Crypto. Why Is That Debatable?
On May 22, the Hong-Kong based crypto exchange HotBit ceased to operate, forcing users to withdraw the funds. Seemingly, it would be pertinent to follow the piece of news with a catchy introduction, stating that “the crypto community was shaken up with an appalling disaster” and implying that Hotbit’s bankruptcy is out-of-the-ordinary. Alas, the downfall of the exchange was a foregone conclusion, and not only due to the notorious limitations to its operation, but also as a rampant backlash resulting from a string of similar collapses affecting centralised exchanges (Bittrex U.S., FTX, Voyager Digital). A depressing tendency has been stepping into its power, raising the relevant concerns about crypto industry state-of-things and amplifying the preconceived users’ attitude towards digital assets. It is clearly observable that the crypto realm is on the doorstep of radical transformation in the best case amidst the recent trends and incidents. However, to make it more simple, two crucial questions must be answered: what is awaiting the crypto industry and why are cryptocurrencies remaining the most advanced and secure assets?
Hotbit: Bits and Pieces of the Context
As has been mentioned above, Hotbit crypto exchange halted its work due to a range of circumstances. According to the exchange’s official statement, three reasons drove Hotbit to “take a bow”. The first one is cited to be the onerous operating environment, which has been dramatically altered for the exchange in result of an investigation aimed at the lender. Reportedly, a former Hotbit employee was involved in an allegedly malicious project, and that led to a part of the exchange’s top-management being subjected to law enforcement. The part and parcel of the event is that Hotbit compulsory suspended its operations due to exchange’s asset freezing. What is more, the reputation of centralised exchanges exceedingly deteriorated due to the FTX collapse and other crises that were followed by “continuous outflows of funds” from the centralised exchanges.
The second factor eliminating Hotbit’s stable operationality is a vast amount of cyber attacks the exchange experienced resulting in the increased number of losses.
“Since its beginning, Hotbit has been characterized by providing a rich variety of assets and value-added methods. However, due to the industry’s uncertainty, various opportunities also contain many risks.” — official Hotbit’s announcement
However, the crucial element ceasing Hotbit’s existence, which simultaneously is a cornerstone of crypto industry metamorphosises, is a dramatic change in its trend. It is indeed subtly noticed by the exchange’s top management as it insightfully claims that “the successive collapse of large centralised institutions has led the industry to gradually in two ways: either embrace the regulation or become more decentralized”.
How the Drawbacks of CEX Shape Today’s Crypto
Indeed, the crypto realm is now reigned not by integrity but by a groundbreaking dilemma for every crypto entity to face: either to comply with the complex technicalities of CEXs, which is a big challenge, or to implement decentralisation, which is a bigger challenge. Why does this happen?
It has not been relatively long since the industry was introduced to the pros and outcomes of decentralization, resulting inter alia in the decentralised exchanges (DEXs) based on smart contracts framework.
(A smart contract is a self-executing protocol with the terms of the agreement written into code. They are typically built on the basis of blockchain, eg. Ethereum. — author’s note.)
To be more specific, the DEXs unlock a great bunch of advantages in comparison with centralised exchanges. For instance, decentralised exchanges do not place books of orders or asset custody in a single broker’s network, but on the contrary, the processes are held on an unique, newly emerged connection between the parties, which indicates smart contracts’ prevailing efficiency and security. The last one has always been a foremost cruciality and has always profoundly affected the overall flow of crypto realm’s functionality.
Notably, in this day and age, the rise of crypto awareness showed its eminent boost, meaning that more and more people are not only interested in digital assets but also understand the technological and market processes, which is exactly the opposite to the state-of-things that was observable a couple years ago. The decent acquaintance with the crypto industry, however, does lead to the concerns and discerning risks assessment, and a large number of recent centralised exchange’s bankruptcies acted simply as a catalyst and undoubtedly stimulated people’s cautiousness and prejudice towards cryptocurrencies. Consequently, the CEXs users were tend to withdraw the funds and decrease their trading volume after every large exchange’s going to the wall. Besides, cumbersomeness of centralised exchanges’ functionality and primarily security and trust issues, emanated by a non-distributed custody of assets, also turn out to be a pivotal factor in diminishing the centralised exchanges’ trading volume. Additionally, according to Chainalysis, the transaction volume on top 5 DEXs is higher than the concentration of volume on top 5 CEXs, which exhaustively indicates the increased popularity of decentralised exchanges compared to centralised ones.
But here is the twist. The dominance of DEXs took place in June 2021 when decentralized exchanges held more than 80% of on-chain transactions, but now the volume is pretty evenly split, with 55% transactions happening on DEXs and 45% on CEXs, as of June 2022. What is more, the centralised exchanges still show off a dominant share of approximately 96% in total market volume compared to decentralised exchange’s roughly 4%, according to TokenInsight. Does that mean the CEXs are still far ahead of decentralised exchanges?
Reason for CEXs Dominance
Given all the risks and cons, the crypto community is indeed still fond of actively using centralised exchanges for their financial operations. Apparently, there are several reasons for that:
- Higher liquidity and increased trading volume compared to the DEXs;
- Deeper versatility of the assets available for trading;
- Advanced trading features;
- Simplicity.
It is also important to point out that centralised exchanges are advancing the custody of assets as much as possible by advancing the total security, and that finds customer’s devotion. Accordingly, the average user prefers either tried-and-true exchange (Binance) or the one with upscale security means (Coinbase, Kraken, WhiteBIT).
The lastly mentioned above factor may be the most crucial in determining the reasons for a wide usage of centralised exchanges, but all of them combined (and pure statistics as well) leave us with the bigger picture: centralised exchanges are still widely used, despite the fact their reputation has become impaired.
Nutshell: What Is Awaiting Crypto Amid Today’s Challenges?
Ultimately, the crypto industry’s state-of-things leaves much to be desired. The constantly challenging environment of the realm is becoming harsher, making the major crypto entities to face the music and comply with the alterations. Amid the government regulations’ obscurity and rigidity, massive reputational crisis and changes in overall crypto trend, the decentralized exchanges’ popularity is indeed increasing, yet they are still not the leading ones in the market and are in the process of fierce competition versus CEXs, which still hold the torch of leadership. Nevertheless, the risks of centralised exchanges’ viability require them to continually evolve in terms of security, protection and technological basis, as their positive outcome can be clearly noticeable from the major crypto players.
Apparently, the industry is facing tough times as well as a choice cited by Hotbit’s top-management which was mentioned above: either to contend with the difficulties by CEX or to become decentralised. However, whether this complexities are complied with, and centralised exchanges are given proper troubleshooting, and the proper challenges of adapting to crypto regulations and advancing the user-friendly services are overcome,
