Is DeFi poised to eat the lunch of crypto OTC desks?

Trading in the digital asset world has continued to evolve at a fast clip. 

Over-the-counter trading desks dominated the market in the heady days of 2017. Firms like Circle Trade and DRW's Cumberland sat at the center of the nascent market's liquidity. At the time, they provided an avenue by which large traders could move coin in size without having to worry about an exchange outage or slippage resulting from the market moving against them. Exchanges, meanwhile, were more unreliable.

In 2020, the market looks different. For starters, the players are different. Circle Trade was ultimately sold off to Kraken, following a mass exodus of its staff. Newcomers like Alameda Research have come online while long-time market participants have seen their presence grow, such as B2C2.

The market structure looks different as well. Once known for its Skype and Telegram-brokered trades, the crypto OTC market has mostly electronified. Spreads have also compressed, resulting in less of an opportunity for profit, in the aggregate. Exchanges have also beefed up their platforms. 

That brings us to DeFi. For the first time, arguably, since the 2017 boom, decentralized finance protocols present a more material threat to players in the central finance space. In 2017, DEXes ranging from Gnosis to AirSwap promised to topple the old guard with trading platforms on which participants could engage on a peer-to-peer basis. Few of those platforms generated impressive volumes. 

But now, traders say today's decentralized trading platforms actually are giving OTC brokers a run for their money. Curve, specifically, appears to offer a beneficial alternative for traders looking to swap stablecoins, which has grown to become a sizable market in crypto. 

The total stablecoin supply has grown to $14.8 billion. A few dynamics are driving that growth, including the need for stablecoins to engage with these burgeoning decentralized marketplaces as well as their use as collateral on various centralized exchanges.

Platforms like Curve and 1inch can offer less slippage in some instances than centralized desks. A test by The Block shows that, trade could swap $100 million worth of USDC for the same amount of USDT for just 0.06% in fees and slippage. That's a figure one OTC trading executive described to this reporter as tough for a desk to beat "for sure!"

Ricky Li of Altonomy noted that such platforms are "closing down the spread." He added that DEX volume is catching up with OTC stablecoin volume. 

There are other benefits, too. For instance, traders don't have to worry about KYC and the time spent to onboard. Of course, this serves as a double-edged sword as certain market participants won't want to trade on a platform where they don't know who is on the other side. In some cases, they're legally barred from participating. There's also a technology risk. 

Indeed, OTC desks might not even be interested in handling stablecoin swaps as they would likely want to avoid trades in which they are effectively exchanging something worth $1 for another something worth the same amount.

Still, this could be just the beginning for platforms like Curve. As noted by Paolo Ardoino of crypto exchange Bitfinex, desks likely won't miss out on the stablecoin flow too much, adding it is not "of primary interest of OTC desks."

"In order to properly eat OTC desks' lunch there should be more wrapped native tokens from other chains (not just BTC) and increased liquidity across all assets," he said. "I'm not ruling it out, it's definitely a future possibility."

For example, there have been many initiatives launched recently to bridge assets across different chains. FTX's recently unveiled DEX, Serum, is also attempting to create wrapped versions of different tokens.