The exchange is going to change? The rise of decentralized exchanges cannibalize users and grab traffic

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In 2020, driven by the DeFi wave, decentralized exchanges will become popular.

Since April, its market share has grown rapidly, and it has continued to erode the market of centralized exchanges. For example, Uniswap, the leader in decentralized exchanges, beat Coinbase in terms of trading volume. “The exchange market is going to change.” Some players sigh.

In the face of this change, traditional exchanges will not sit still. They have launched their own decentralized exchange services. But it is not easy to destroy one’s own life.

An exchange melee has begun.

Threat

Since the second half of this year, the decentralized exchange (DEX) in the DeFi ecosystem has been on the rise.

According to data from Dune Analytics, the data analysis platform of Ethereum, since June, the transaction volume of decentralized exchanges has increased rapidly. By the beginning of September, its total monthly transaction volume had risen from US$1.579 billion to US$13.135 billion, a surge of 731% in three months.

Among them, only the trading volume of the exchange Uniswap achieved a 283% increase in one month.

In the past year, the trading volume of DEX on the Ethereum platform was only $2.4 billion. But in just one month of June this year, its transaction volume reached $4.3 billion. In July and August, the Ethereum platform DEX achieved more than ten billion U.S. dollars in transaction volume for two consecutive months.

“In the several groups I’m in, everyone is withdrawing coins from exchanges such as Binance and OK, switching to digging sushi and digging pearls.” Coin circle player Zhang Peng told reporters, “There is even an army of withdrawals. Someone took away 700,000 EOS from OK at once.”

A large amount of traffic and assets flow from CEX to DEX, and the dominance of traditional centralized exchanges is being shaken.

The chart drawn by the overseas blockchain media The Block shows that from April to August, the ratio of DEX to CEX spot trading volume has increased for four consecutive months, reaching 6.06%. In other words, every time a centralized exchange generates a transaction volume of $100, a decentralized exchange will simultaneously generate a transaction volume of $6.

What does this number mean? Throughout 2019, this figure has been below 1%.

DEX cannibalize the CEX market faster and faster. “Will the trading volume of DEX surpass that of CEX?” With the growing momentum of decentralized exchanges, some people even raised such questions.

In fact, in the history of the currency circle, DEX has been tepid for a long time due to low transaction efficiency and extremely unsmooth transaction experience.

It was not until the emergence of a new generation of DEX such as Uniswap and Balancer and the outbreak of the DeFi ecosystem that DEX emerged.

Compared with traditional DEX, exchanges such as Uniswap have adopted a new model of automated market maker (AMM), where the player’s opponent becomes the exchange’s fund pool instead of other players. Therefore, players’ transaction efficiency and transaction experience have been greatly improved, and transaction fees have been reduced.

Since then, products such as Sushiswap inherited Uniswap’s AMM model and introduced a new mechanism for liquidity mining. Suddenly, various types of swap exchanges emerged endlessly.

According to CoinMarketCap data, Uniswap exchange’s 24-hour trading volume ranks 43rd. Taking into account the widespread phenomenon of scalping in centralized exchanges, Uniswap’s actual trading volume ranking has exceeded many traditional exchanges.

“Coinbase, an overseas exchange that follows the compliance route, has more real trading volume data, while Uniswap’s trading volume has surpassed Coinbase. It may only be a matter of time before DEX replaces CEX.” Zhang Peng said.

defense

DEX is coming so fiercely that traditional centralized exchanges have to face it head-on.

Their first move is to launch their own DEX products.

In early September of this year, Binance launched its first swap DEX platform Binance Liquid Swap. Prior to 2019, Binance also launched Binance DEX, a traditional order-thin DEX platform.

In August, Xu Kun, OKEx’s chief strategy officer, revealed that OKEx has set up a small team inside and is studying the AMM model. On September 13, OK changed its public chain platform “OKChain” to “OKEx trading chain”. This means that it will focus on trading scenarios. OKEx CEO Jay Hao said that the technical advantage of this public chain is to “create the world’s top full-service DEX.”

The rise of decentralized exchanges is inseparable from the DeFi ecology. Therefore, the second strategy for centralized exchanges is to launch products such as DeFi mining and new currency mining to retain profit-seeking players.

Take Huobi as an example. Huobi launched a DeFi zone, gathering a large number of popular DeFi projects such as YFI, YAM, and SUSHI. “Recently, the speed of the three major DeFi tokens is unique.” Some players in the currency circle said.

On September 7, Huobi launched the first phase of “New Coin Mining”. It is said that the first token ACH was stolen within 50.4 seconds of the launch. Four days later, the tokens of the second period were robbed within 3.7 seconds.

However, most of the attempts at centralized exchanges were not successful.

SwapTuna on the Binance Smart Chain suffered a smash hit one hour after it went online, and the currency price almost returned to zero. The Bakery recommended by Binance founder Zhao Changpeng was also unfavorable. After the currency price plummeted, Zhao Changpeng low-key deleted the Twitter that recommended the project.

“CEX doing DEX is mostly a defensive strategy.” Exchange practitioner Mao Pu said, “It is unknown how many resources they will invest.”

This is because traditional centralized exchanges will not kill themselves. Facing the DEX wave, their optimal strategy is to launch DEX and invest appropriate resources to promote it. And CEX is still the basic market of these exchanges.

“Players in the currency circle don’t have much loyalty to the exchange. Which platform allows them to make money, they will switch to where.” Maopu said that once the DEX ebbs, players who switch to DEX will return to CEX in large numbers. Therefore, traditional centralized exchanges will not really invest in the DEX market.

In fact, this phenomenon has already begun to appear. On September 13, SushiSwap reduced its block rewards as planned. Since then, the total lock-up volume of the platform has dropped rapidly, and more than 40% of the funds have flowed out.

future

In the future, what kind of pattern will be formed between DEX and CEX?

Many players and practitioners said that the DEX market space will be further expanded, and the second and third-tier CEX exchanges will be most directly impacted by DEX. But DEX is still difficult to replace CEX. In the future, the two will coexist for a long time.

In fact, DEX and CEX each have advantages and disadvantages. Sometimes, the advantages and disadvantages are relative.

For example, the threshold of DEX listing is low, players can have more investment targets, but also face greater risks. DEX assets are independently controlled by players, and the platform cannot be privately swallowed, but once the user loses the private key, the platform cannot retrieve the assets for the user. DEX’s product structure is simple and the development cost is low, but the threshold for players is also higher.

“For many coin hoarders in the currency circle, decentralized exchanges are too troublesome to use, and it is difficult for these people to become users of decentralized exchanges.” Zhang Peng said.

But at present, CEX still has many advantages, which is difficult to replace by DEX.

First of all, CEX mostly operates as a company, chasing profit, so it has the motivation to attract new players. In the pull new, CEX undertakes an important task.

Second, CEX can directly face supervision and compliance operations, and has greater room for development.

Finally, the biggest advantage of CEX lies in its rich product features, such as leverage, futures, options, take profit and stop loss and other functional modules, as well as the legal currency trading function that DEX cannot replace.

These differences make the driving mode of DEX and CEX completely different. “The core driving force of CEX is to serve customers, while the core driving force of DEX is technology and mode.” Maopu said.

“DEX attracts people with the strongest information acquisition ability in the currency circle and the most willing to try new things. And ordinary players will still favor CEX with better user experience and more convenient operation.” He said.

In this regard, Uniswap has similarities with ICO investment platforms such as Yunbi.com, which was popular in 2017. On Yunbi.com, players can directly participate in ICO; and on Uniswap, players can quickly trade new online. DeFi tokens.

But they also need to take higher risks. Some Yunbi players became rich overnight, while others lost their money.

Uniswap is the same. Someone bought counterfeit money and went straight out. (For details, please refer to “The Proliferation of Counterfeit Currency in the Currency Circle: Counterfeit Groups Defrauding Hundreds of Millions, Buying Villas and Driving Luxury Cars”)

In the crazy land of the currency circle, behind the banner of freedom, there are many risks.

The fierce battle between DEX and CEX is continuing. It seems that DEX is temporarily on the offensive.

But when the plunge comes and the leverage collapses, we don’t know who is the last laugh.

*The interviewee in the text is a pseudonym.