Decentralized exchanges differ from their centralized counterparts (such as FTX, Binance, Coinbase, and others) in a number of important ways. Most importantly, rather than relying on a middleman to match buyers and sellers, DEXs allow users to transact on a peer-to-peer basis and maintain custody of their own funds.
This arrangement is an example of what is known as decentralized finance, or DeFi, an initiative to develop a range of financial services on top of blockchain technology. In a Twitter thread published in July 2020 that now reads like a grim prophecy, Bankman-Fried described DeFi as “filled with potential” because it’s not about “relying on trust.”
Community members see the collapse of FTX as a key moment for DeFi, which they believe is a solution to the problems that have dogged the crypto sector over the past year, following the collapse of major centralized organizations such as cryptocurrency lender Celsius and hedge fund Three Arrows Capital.
According to Hayden Adams, founder of UniSwap, the world’s largest DEX, this is “a great learning opportunity for the industry”. While the DEX model suffers from a steeper learning curve for new users, he says, it eliminates the need to store coins at an exchange, giving FTX the ability to divert money from customers primarily to its sister company Alameda Research.
Andrew Trudel, an employee of Kwenta, another DEX, says clients can never be completely sure what happens to their assets within a centralized exchange. But with a DEX, “how funds are used is completely transparent” because everything is hosted on a public blockchain, he argues. Both Trudel and Adams predict that traffic to decentralized exchanges will eventually outpace traditional exchanges for these reasons.
With FTX in ruins and the integrity of powerful, centralized crypto companies questioned, DeFi is having a moment. But with Open Book running, the volunteers face a series of dilemmas. The original goal was to prevent Serum’s collapse from spilling over into the wider Solana ecosystem, but the group now has to deal with the continued management of the DEX, which is an entirely different proposition.
One of the first questions under discussion is what to do with SRM, the token created by FTX for Serum, worth $2.2 billion stated on the company’s balance sheet. The token, which gives holders a discount on trading fees, is still supported by Open Book at the time of writing.
Some Open Book volunteers, including Long, prefer to see the back of FTX, period. Long says supporting SRM provides no material benefit to Open Book users and only serves to put money in FTX’s pockets because the value of SRM is effectively tied to the revenue generated by the exchange.
The management structure of the new DEX also raised eyebrows. In a thread published on Nov. 18, the Open Book volunteers explained that “upgrade authority” is now held by a small consortium of “renowned figures” from the Solana development community. Although the new model successfully disables FTX, merchants wonder if one overly centralized model has simply been replaced by another. The group of volunteers has yet to answer this question.