The DEX, which did not worry crypto exchanges last year, has now achieved a surpass in a number of indicators.
Original title: “CEX’s Q3 performance encounters Waterloo DEX or will achieve overtaking in corners”
Written by: Bai Ze Research Institute
Although the crypto market is so hot recently, even so, it is not so easy to compete as a crypto exchange for trading share.
After the U.S. regulated and compliant crypto exchange Coinbase announced its third-quarter results, net income fell 41% from the previous quarter to 1.3 billion U.S. dollars. Trading users fell from 8.8 million in the second quarter to 7.4 million, and quarterly trading volume declined. 29% to 327 billion US dollars. This was far below investor expectations, causing Coinbase’s share price to fall by 8% the day before yesterday.
Alesia Haas, Coinbase’s chief financial officer, said on the conference call that a calmer market environment is putting pressure on the company’s performance. “Our third-quarter performance depends on the low volatility in the market that we saw at the beginning of this quarter. Our monthly trading users and transaction volume, as well as the transaction fee income generated, are all related to volatility.”
Similar to Coinbase, Robinhood, a commission-free trading platform that has been listed and known as the “gathering of retail investors in the United States”, had similarly unremarkable performance in the third quarter. Investors seem not to be impressed by the surge in income from Dogecoin on Robinhood. At the same time, popular centralized exchanges (CEX) such as Kraken and Bitfinex have also experienced performance waterloo.
The fate of crypto-centralized exchanges such as Coinbase depends to a large extent on the continued growth of the two most popular crypto assets, Bitcoin and Ethereum . Bitcoin accounted for 19% of Coinbase’s transaction volume in the third quarter, while Ethereum accounted for 22%. Therefore, the recent breakthrough of the prices of Bitcoin and Ethereum to record highs bodes well for their fourth quarter results.
Looking to the future, the fate of a number of crypto-centralized exchanges such as Coinbase may be related to the trend of cryptocurrency adoption.
Coinbase said in a letter to shareholders: “Don’t make short-term investments. An investment in Coinbase is actually a long-term investment in the growth of the crypto economy and our ability to provide services to users through products and services.”
Number growth trend
Most centralized exchanges do not report earnings because they are not listed companies. However, a new research report by the blockchain data analysis company Chainalysis has unveiled this fierce trading business share battle for us.
In the past year, the crypto-centralized exchanges that are on the path of growth have some common characteristics: Compared with their competitors, they are larger, more innovative and provide more crypto assets. Chainalysis found that based on these characteristics, large companies like Binance, Coinbase, and FTX have been at the top of the crypto trading rankings.
According to Chainalysis’s data, since July 2020, the overall pattern of centralized exchanges has been shrinking. And like other industries, the business of larger players grows faster than their smaller counterparts.
By tracking the value of encrypted assets sent to more than 1,500 exchanges in the past year, Chainalysis divides exchanges into different categories based on business models. These categories include over-the-counter (OTC) brokers, high-risk trading (HRE), centralized trading (CEX), decentralized trading (DEX), and derivatives trading. The figure below shows the growth trend of the number of various exchanges:
Different business models
Over-the-counter (OTC) brokers such as Circle, ItBit and Genesis Trading provide more personalized services for high-spending customers. This type of trading service is done behind closed doors and only caters to investors who are interested in buying and selling large amounts of crypto assets-which means they need a lot of liquidity.
High-risk exchanges are defined as encrypted centralized exchanges with minimum KYC requirements, and this category is the “Wild West” of the crypto world. This type of exchange will be favored by investors who intend to protect privacy, and lower regulatory requirements may also mean that this type of transaction is often less credible and more risky.
At the same time, the Centralized Exchange (CEX) provides the most extensive trading services for users who wish to invest in crypto assets, including some large exchanges calculated by trading volume, such as Binance, Coinbase, Gemini, Huobi, Kraken and Okex.
Except that Coinbase and Robinhood will benefit from scale to a certain extent, the growth rate of decentralized exchanges (DEX) and derivatives exchanges this year is very fast.
Derivative exchanges such as Binance, FTX, ByBit, and Deribit mainly provide leveraged crypto products, and customers can borrow to buy futures or option contracts to increase their income.
For derivatives exchanges and large centralized exchanges, customers trade stablecoins the most.
Segment by size and receiving value
Each category is further subdivided according to the size, and all exchanges are divided into small or large. The definition of a small exchange is that the value of encrypted assets received from users in the past year is less than 10 million U.S. dollars.
In addition, the centralized exchange can also be split into:
- Encryption to Encryption (C2C): only allows trading of different types of encrypted assets.
- Crypto to legal currency (C2F): Allow users to convert legal currency into encrypted assets.
Then in the subdivided exchanges, according to the number of growth, the data chart is:
We can observe that large decentralized exchanges, large high-risk exchanges, and large exchanges in the “other” category (which are nominally C2F, but their users regard it as C2C) have the fastest growth in number . So far, all three types of exchanges have more than tripled. Several other categories are growing slowly, including large over-the-counter exchanges, large C2F exchanges, and derivatives exchanges. The number of small exchanges in all the above categories is decreasing.
Of course, the increase in the number of exchanges in each category is not the only way to judge the status quo. After all, crypto businesses are not just for survival-they need to expand their user base and transaction volume to thrive.
If you look at the value of encrypted assets received by these types of exchanges:
It can be seen that the trading volume of large decentralized exchanges (DEX), large over-the-counter traders and large centralized exchanges has increased significantly. However, although the number has not increased significantly, the value of encrypted assets received by derivatives exchanges has increased the most, at 686%. On the other hand, for almost all types of small exchanges, the amount of crypto assets they receive has decreased significantly.
And decentralized exchanges have become more and more popular, which generally coincides with the explosive growth of DeFi.
DeFi is becoming more and more popular
The transaction volume generated by DeFi is often much larger than those of centralized exchanges, and it can even act as a ” crypto market center “.
According to the chart data, we can see that the value of transactions conducted by users of decentralized exchanges (DEX) is much greater than that of users of centralized exchanges. The average transaction value of decentralized exchanges (DEX) exceeds 26,000 US dollars. The centralized exchange is only 12,000 US dollars; the median transaction value of the decentralized exchange (DEX) is slightly higher than 900 US dollars, while the centralized exchange is only 150 US dollars. This may be because DeFi is more popular in countries with larger and more mature crypto markets.
David Gogel, head of the decentralized exchange dYdX, believes that most DeFi users are mature investors looking for new sources of income, so it makes sense that their average transaction size is larger. The average transaction size of the derivatives exchange shown in the figure above is also larger than that of the centralized exchange, which is the same reason.
In addition, decentralized exchanges (DEX) are more flexible . The current asset balance of Uniswap, the leading trading agreement, is US$90.89 billion, and the transaction volume in the past 7 days has exceeded US$101.78 billion. Although it is technically decentralized, Uniswap Labs is still the administrator of the agreement, with less than 50 employees. Compared with major centralized exchanges such as Coinbase, Robinhood, and Binance, its flexibility is impressive. Incredibly, these centralized exchanges all have at least 1,200 employees.
Other views
The number of tradable crypto assets also plays an important role in the survival rate of exchanges. Although some exchanges that offer fewer crypto assets still perform well, offering more types of crypto assets will directly affect the value of crypto assets that exchanges receive each month.
However, listing a new crypto asset is not an easy task for exchanges. It also depends on exchanges weighing regulatory barriers and considering the risks that investors will face. But Robinhood seems to have solved this problem because more and more customers are requesting new crypto assets, such as Shib, to be listed on the trading platform. Unlike other centralized exchanges such as Binance or Coinbase, Robinhood has adopted a more cautious attitude and only listed more than 30 crypto assets in 2021, instead of choosing to directly list more time-tested old crypto assets.
Summarize
In this competition for the share and pattern of the encrypted trading business, “innovation and scale” are the key to achieving differentiation and growth.
Decentralized exchanges (DEX) have demonstrated innovation. These decentralized, non-custodial platforms will not worry centralized exchanges last year. However, in a few months since then, DEX has achieved growth in all aspects by allowing users to better control their assets and allowing users to trade new types of encrypted assets.
On the other hand, the centralized exchanges that continue to grow will be those that offer the widest range of crypto asset transactions and are relatively large in scale.
However, C2F exchanges may be an exception to this trend, as they serve as a ramp between crypto and fiat currencies, meaning that they will always be the platform of choice for new users in the crypto world.
