From Binance to Uniswap, trust and integrity will drive crypto forward in 2023

HodlX guest post Submit your post

Trust is a double-edged sword for crypto. Lack of trust is a fundamental principle in this domain. But crypto-powered systems must also be reliable enough for users and investors to participate.

Can the two coexist? Yes, indeed, since distrust is a technical function while reliability is a social one.

A system is trustless if it can function effectively without the users having to trust each other. However, it is reliable if users can trust that it works transparently, securely and consistently.

Given the series of systemic failures and malpractices witnessed in 2022 – from Terra to FTX – crypto innovators must commit to reliability by 2023. It is the only sustainable way forward for the industry to regain investor confidence and ensure adequate consumer protection.

It’s easier said than done, but fortunately the tools to ensure systemic robustness and consistent performance are already available. The need of the hour is to use them with integrity and a forward-looking approach.

Crypto cannot afford the cost of mistrust

Trust is more easily lost than gained – pespecially in an emerging technology-driven industry like crypto that already has an abundance of critics and naysayers.

The belief in the future potential of crypto-based systems is the key to their success. Some call it speculation, but it is such a belief that inspires early adopters to jump on the bandwagon.

Be it HODLing despite market downturns or buying real estate in the metaverse, crypto thrives on the promise of a better future.

The beauty (and significance) of it all is that it is actually possible and not just a myth. This is also why it bounced back time and time again despite volatility, regulatory attacks and the like.

But everything is at risk when respected and revered faces end up on the wrong side of the profit game.

Serious allegations and revelations thus shook the industry to its core in 2022, with massive ripple effects that could continue through 2023. Confidence was significantly hampered – if not lost altogether.

Unfortunately, recent failures exacted a hefty price on the hitherto burgeoning crypto industry. The total economic losses across protocols amounted to over $3 billion in 2022.

And now mass layoffs continue, with more than 26,000 employees losing their jobs. It is essentially the price of distrust – something the industry cannot afford to pay for long.

You have to look the devil in the eye

Establishing trust is neither rocket science nor child’s play. It is about prioritizing progressive norms such as openness, integrity, accessibility and security.

But this can only be achieved by identifying the existing loopholes (ie the roots of crises). One cannot possibly solve problems without understanding their causes. Unless, of course, they settle for ad hoc solutions.

The declining investor confidence and distrust of the crypto industry today has many reasons. Greed is perhaps one of them.

But more worryingly, it is because of the liquidity fragmentation inherent to the current landscape. Crypto exchanges and protocols can rarely interact, let alone share liquidity – a recipe for doomsday.

Several exciting avenues have emerged recently, from crypto-secured loans to high-frequency, algorithmic trading to stablecoins. Yet it has been impossible to actually tap into their collective value so far since crypto assets remain locked in isolated silos.

Although innovations to increase interoperability and composability are well under way, there is still a long way to go in this direction.

Insufficient liquidity – in addition to obvious understatement – are currently among the biggest threats to systemic integrity in the crypto industry.

It is therefore necessary to implement smart systems for deep liquidity aggregation across centralized and decentralized exchanges.

Such solutions must also be intuitive and user-friendly, and minimize friction to the greatest extent possible. And they must be transparent enough to discourage fraudulent activities.

Smart order routing can add the finishing touches

Liquidity points on the crypto landscape are like stars in the night sky – scattered, almost distant. But it is possible to connect the dots and let the constellations emerge.

SOR (smart order routing) is a potential method in this regard. Although it cannot mitigate malicious intent, it can ensure the best execution of crypto trades.

SOR’s most immediate and practical benefit is optimal price discovery for traders. However, the implications extend far beyond this point. SOR systems improve liquidity distribution.

That too without hampering healthy competition between stock exchanges and marketplaces. Instead, SOR enables the much-needed liquidity interactions between crypto platforms and ecosystems.

Combining AI (artificial intelligence) makes SOR even smarter, enabling order matching and low-latency execution with minimal risk.

This can increase investor confidence and consumer protection by providing hedging exposures, deeper liquidity and less slippage. Fast trade execution also allows for immediate exits when unavoidable, adding a new buffer for distressed investors.

Making AI and SOR driven systems the norm will allow the crypto industry to build systemic integrity from the ground up. This can also be a means of eradicating liquidity crises for good.

Of course, it will happen in the long run, one step at a time. But even at this moment, such progressive systems are essential to make crypto trustworthy again.

Finally, setting the right standards and following them is the way crypto can regain the lost trust. That is why it needs sustainable innovations from dedicated and honest innovators.

One needs to get into crypto for the long term rather than trying to get by on quick wins.

Because actions that destabilize trust and integrity are not good for anyone, the sooner this becomes part of the crypto community’s collective consciousness, the better for the future.

Ahmed Ismail is the CEO and President of FLUID, a liquidity aggregator that uses AI quant-based models to tackle fragmented liquidity in virtual asset markets. Ahmed has 18 years of experience from some of the largest financial institutions globally, including Bank of America, Credit Suisse and Jefferies. After his time at Jefferies as the US investment bank’s youngest regional managing director, he co-founded HAYVN.

Featured image: Shutterstock/Modvector/Sergey Dzyuba