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Animats

As usual, the trouble with cryptocurrency exchanges is that they mix multiple functions.

* They're an exchange, matching orders.

* They're a retail broker, taking orders from customers and holding funds.

* They're a custody institution, holding both fiat and cryptocurrencies.

* They're banks, lending to others and receiving interest, and borrowing from customers and receiving interest.

* They're traders themselves, for their own account.

Now, in the real world, all of those functions used to be done by separate companies. With "deregulation", there are banks which have brokerage, custody, and trading units, and they do get into trouble. Which is why those are all highly regulated industries with a lot of inspection, required disclosure, and insurance backup.

You'd think the "decentralized finance" people would have figured out a way to separate those functions by now. But no.

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> You'd think the "decentralized finance" people would have figured out a way to separate those functions by now. But no.

But yes. I'm not sure how you've heard the term "decentralised finance" but haven't heard of decentralised exchanges, both traditional Ethereum DEXs and more novel cross chain ones. They successfully separate out:

- User funds by self custody

- protocol rules that are publicly verifiable.

- build/bring your own front end

- market making- AMM, order relayers + others

- lending and borrowing including the above stack in completely separate but composable protocols

Huh? Any broker I've dealt with had the following:

* Order matching (in-housing of orders so they can pocket the brokerage fee without actually incuring exchange fees as well as make money off their inventory)

* Placing orders and holding the funds I send to buy stocks with

* Custodian that holds both my stocks (in their name) as well as my fiat

* Banking, they allow opening of margin accounts where I can borrow fiat to speculate with, and all of the assets within such accounts can / are lent out (if you are big enough you will even get interest on these assets)

* Strictly speaking, most brokers aren't traders on their own platform... but in-housing of orders produces pretty much the same effect... so the distinction seems pretty meaningless. E.g. they buy stock at $x, internalize orders that are profitable when selling said stock at $x + $1 (but below or matching market rate), profit.

Several functions are intrinsicly linked there. You can't buy or sell anything without having them hold the asset / fiat... even if only for the T+2 days to settle.

> You can't buy or sell anything without having them hold the asset / fiat... even if only for the T+2 days to settle.

I thought DTCC and NSCC took care of that, for like, everyone. No?

All of my brokers have required funds in settlement account prior to settlement date, with some being fine with transfer of funds on t+2 if they could see enough money in an attached account.

In fairness, BitMart is not "decentralized finance", it's a privately owned business that allows it's customers to trade crypto.

I work in a bank, we could get robbed by social engineering (and are ridiculously paranoid, we even have phishing exercises when the bank send you a link, you click on it and they say "dude that could have been phishing, read xyz to learn how to stop clicking on every link you re shown"), but these 200M remote hacks look a bit too frequent and a bit too easy with crypto - you dont even need corruption and insider trading it seems now.

I've literally had people at prop trading firms gush about how crypto exchanges work - "You're the exchange so you literally know where everyone's stop losses are!", it's absurd you're the exchange but you're also the largest market maker, flash crash through a load of stop losses and pick up a tonne of coins at below market rate.

Decentralized finance is a pipe dream. If it were truly decentralized we would have individuals managing all of the responsibilities you listed. Fraud would be EVEN MORE common.

I forgot where I read this, but someone said something like "Crypto advocates are learning in real time why finance/banks are centralized. They're playing out the history of finance reform at hyperspeed."

Soon they ll innovate by having government backed physical "coin" they ll call coin notes :D

Gemini is FDIC backed up to US$250K per account. I think they are taking the regulation thing seriously. They are also fully backed stablecoin because they only have like $300MM in assets, so it is easier to back. Although I still have trouble getting my head around "Winklevoss Dollars".

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