Recently, the 24-hour trading volume history of Uniswap, the leader of the DeFi decentralized exchange (DEX) track, surpassed the mainstream centralized exchange (CEX) Coinbase for the first time. Although Coinbase is not the largest exchange in the crypto world, DEX seems to be Catch up with traditional encrypted trading platforms.
Uniswap transaction volume exceeds Coinbase
Uniswap is a decentralized exchange and automatic liquidity market-making protocol. Users can buy and sell ERC20 tokens on Uniswap or provide liquidity for Uniswap to earn exchange fees. This means that the greater the trading volume on the platform, the more rewards liquidity providers will receive. DeFi Pulse’s data shows that the increase in transaction volume and the subsequent increase in market-making income have caused the total value of the locked tokens in Uniswap to rise rapidly, and it is currently close to 1.45 billion US dollars. Uniswap has also become the largest at present. DeFi protocol.
Although DEX has existed for some time, traditional centralized exchanges have always occupied this dominant position due to various reasons. The biggest reason is convenience. However, with the advancement of technology, DEX has become more advanced and easy to use. Let’s take a closer look at the operating mechanism of DEX and what they provide for the crypto community and other fields.
Types of DEX
There are generally several types of DEX, which are based on different blockchain networks. Popular examples include the aforementioned Uniswap, which is a DEX based on Ethereum, and the same DEX as well as Curve, dYdX, EtherDelta, Waves, etc.
Uniswap is an automated market maker, which means that it can automatically arrange transactions through smart contracts. These contracts obtain funds from a liquidity pool. This means that transactions are always liquid, but the exchange itself has limited types of tokens. For example, Uniswap (and its forks, SushiSwap, etc.) allows users to trade various ERC20 tokens, while Curve focuses on stablecoins and provides traders with extremely low slippage. Not all stablecoins with low liquidity are Can do this.
Although protocols such as Uniswap and Curve have become popular, before that, 0x and EtherDelta were the most popular decentralized exchanges on Ethereum. They look more like typical traditional exchanges with traditional Order books (pending order systems), unlike CEX, they are fully supported by smart contracts on the Ethereum blockchain.
Why has DEX become popular?
The reason why DEX has become popular is mainly because it is the same as Bitcoin transactions: it does not rely on any third parties, so users can control their funds by accessing their wallets and signing transactions at any time. As long as the smart contract is secure, almost no one can embezzle funds. Therefore, theoretically speaking, DEX is difficult to be attacked by hackers.
In addition, since there is no centralized platform involved in the transaction process, there is no need to provide any other information or documents, and no KYC verification procedures are required. (Note: The full name of KYC is Know Your Customer, which refers to the process by which the trading platform obtains customer-related identification information. Its purpose is to ensure that users who do not meet the standards cannot use the services provided by the platform. At the same time, it can be used for some criminal activities in the future. Provide investigation basis for law enforcement agencies during investigation)
It is also worth noting that DEX does not allow users to exchange legal currency, only stable currency. Moreover, because these protocols are decentralized, such as Uniswap does not have any currency listing rules, DEX also has the problem of people adding counterfeit tokens to the exchange. Despite this, DEX has gained tremendous popularity. The founder of Cointelligence stated:
Due to the COVID-19 pandemic and home quarantine measures, we are in the midst of another financial crisis in 2020, which drives more people to become interested in alternative financial instruments and assets. I am sure that it (DEX) will continue, although it may take several years to develop and progress.
Some problems with DEX
Using DEX has both advantages and disadvantages, but from the current point of view, the disadvantages seem to be more. For example, centralized exchanges were once the only option for cryptocurrency trading, so DEX has no first-mover advantage.
Another obvious problem is the lack of liquidity. Although the growth of liquidity providers has significantly improved this, compared with the liquidity of centralized exchanges, DEX still has a long way to go. Ilya Abugov, Head of OpenData of DeFi analysis platform DappRadar, said:
Exchanges still need to be able to obtain and maintain a meaningful level of liquidity. In view of the recent hot development trend of DeFi, DEX must seize the opportunity and keep pace with it. At the same time, as the speed of development and marketing have allowed DEX to emerge, the technology should also keep up in time and should not become a burden.
DEX has other shortcomings, such as high transaction fees, which may rise sharply due to congestion on the Ethereum network. Considering the current performance of the Ethereum network, this may be the biggest problem currently limiting DEX.
The user interface has always been considered a problem in DeFi. Although this may not be the biggest problem for some people, in mainstream applications, ease of use and a friendly visual appearance are important. Considering the nature of DEX platforms, the UI may sometimes be difficult to determine, but their UI is indeed constantly improving.
In addition, DEX does not provide the wide range of services and functions that other exchanges can provide, such as certain types of financial derivatives or margin trading, or even comprehensive services like the latter. However, since DEX is decentralized, there is no abuse of power or other problems by centralized exchanges.
CeFi and DeFi: Interoperability, Institutionalization and Competition
So far, DeFi has become the focus of the crypto world, and some institutional investors have also begun to get involved in the DeFi field. Lanre Ige, a research assistant at 21Shares, told Cointelegraph that there are signs that institutions have begun to be interested in altcoins and DeFi:
In view of the fact that there are not many products that can provide DeFi investment for institutional investors, it is too early to judge the extent to which institutions will participate in DeFi. However, the ETP-related products of BNB and Tezos are two of our most popular at present, which is a signal that some institutions are beginning to be interested in altcoins and DeFi. We believe that this situation will continue to grow as more and more products (such as ETP) are available for DeFi.
Therefore, whether it is within DeFi itself or interoperability with the traditional financial sector, it must become the main focus. Synthetix DEX has brought traditional assets into a decentralized environment and has achieved great success in this regard. At the time of writing, it has become the sixth largest DeFi protocol. Other projects such as Komodo focus on providing decentralized exchanges between different blockchains through atomic swap technology (Note: Atomic Swap means decentralization, without the participation of a third party, two people achieve atomic cross-chain fair transactions) service.
Some centralized exchanges such as Bitrue and OKEx have begun to provide high-yield option services through a combination of centralized and decentralized financial instruments as a competitive means to deal with the continuous expansion of DeFi. However, it is not clear whether the current growth of DeFi will continue or whether DEX will eventually return to the previous bleak trading volume situation. According to Abugov, in the long run, DEX still faces some challenges:
DEX may lack some incentive mechanisms. However, as more and more projects choose to use governance tokens and liquidity mining to increase transaction volume, DEX focuses on the convenience of ordinary traders, the friendliness of interactive experience, and the long-term viability of liquidity providers. The model is transformed into farmers who participate in DeFi mining (note: the stem of the DeFi circle, the mining is likened to farmers earning income) to provide the highest income.
