The Centralization Paradox in Cryptocurrency Markets
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THE CENTRALIZATION PARADOX IN
CRYPTOCURRENCY MARKETS
YESHA YADAV*
TABLE OF CONTENTS
I. DECENTRALIZATION, CENTRALIZATION, AND EXCHANGES .............. 1732
A. Marketplace Without Intermediaries..........................................1732
B. Crypto-Exchanges as Centralizing Intermediaries ....................1735
1. What Crypto-Exchanges Do......................................................1736
2. Why Are Crypto-Exchanges So Centralized?............................1737
II. THE PROBLEM OF HYPER-CENTRALIZATION IN CRYPTO MARKETS. 1744
A . Informational Failures ...............................................................1745
B. The Governance Challenge ........................................................1750
CONCLUSIONS ........................................................................................ 1756
INTRODUCTION
The costly and highly public collapse of cryptocurrency exchange FTX
has highlighted two key phenomena central to crypto-market design.' First,
despite its originating claims to decentralization, crypto-markets are
anchored by exchanges that operate in a profoundly centralizing manner. In
other words, single organizations act as anchor intermediaries to perform a
variety of critical functions: marketing, trading, risk management, lending,
venture investing, infrastructure building, and so on.2 A number of crypto-
exchanges have grown rapidly into complex and significant financial
enterprises, whose operations create externalities reaching far beyond the
walls of their own firm. That is, the failure of these large and important
firms imposes costs on third parties that can be high and unpredictable for
* Milton R. Underwood Chair, Associate Dean and Professor of Law, Vanderbilt Law School.
I am enormously grateful for the extraordinarily diligent and careful work of the editors of the
Washington University Law Review, in particular, Nicole Chandonnet, Alissa Gilmer, Tiffany
Middlemas, Yi Zhang, and Aubrey Zimmerling. All errors are my own.
1. Joshua Oliver, Nikou Asgari & Kadhim Shubber, FTX: Inside the Crypto Exchange That
'Accidentally' Lost $8bn, FIN. TIMES (Nov. 18,2022), https://www.ft.com/content/913ff750-dl f4-486a-
9801-e05be2004IcI [https://perma.cc/D36Y-MQ9B]; Kadhim Shubber & Bryce Elder, Revealed: The
Alameda Venture Capital Portfolio, FIN. TIMES (Dec. 6, 2022), https://www.ft.com/content/aaa4a42c-
cfcc-4c60-9dc6-ba6cccb599c6 [https://perma.cc/LPC8-Y56Y].
2. See, e.g., Marco Dcll'Erba, Crypto-Trading Platforms as Exchanges 37-39, 41-45 (2023)
(unpublished manuscript) (on file with author) (noting that 62% of global crypto exchanges surveyed
by the author were centralized-further detailing the range of functions performed by exchanges);
Shubber & Elder, supra note 1.
1725](ViewImageLocal?handle=hein.journals/walq100&div=51&collection=&method=preview&ext=.png&size=3)
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The Centralization Paradox in Cryptocurrency Markets
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