What happened
The collapse of trading on FTX and the resulting liquidity issues on other centralized cryptocurrency exchanges and lending platforms have increased the market share of competitors. Trading volume on the decentralized exchange (DEX) hit $91 billion in November, up 79% from all of October. DEXs are benefiting from their centralized competitors, with trading volume today at 16.7% versus 10.8% in September.
Uniswap is the leading DEX in terms of trading volume and number of users. Founder Hayden Adams recently tweeted that UnisApp has surpassed Coinbase in daily Ether/USD trading volume (~$1.1bn vs ~$600m).
DEX aggregators are also seeing an increase in usage. Aggregators allow traders to explore the entire DEX landscape to find the best prices and lowest commissions for a particular trade, in exchange for the best deals for order execution. 1 inch, DODO, Kyber Network, Matcha and Paraswap.
As the FTX drama unfolded, daily DEX volume on the Ethereum blockchain jumped 640% to $573 million on Nov. 10, up from $77 million just a few days earlier.
Wider context
Because DEXs use decentralized smart contracts encrypted on a public blockchain, users always store their private keys in a crypto wallet, eliminating the counterparty risk inherent in centralized exchanges (CEXs). Users do not have to give up control of their assets while taking advantage of decentralized trading and other financial services.
This is in stark contrast to the centralized infrastructure built to serve cryptographic users. CEX allows users to trade various crypto assets or convert traditional currency offerings into the crypto economy, but users must first deposit assets in order to access liquidity on this platform.
In the case of FTX, centralized exchanges do not appear to support a single pool of user deposits as they should. Instead, he apparently turned the assets over to FTX executives for their personal use and lending to hedge fund subsidiary Alameda Research, as well as bailing out other risky crypto ventures. , such as Blockfy and Voyager.
In addition, FTX launched its own DEX on the Solana block called Serum. Serum has a different architecture from other DEXs, with a central limit order book (CLOB) on the network instead of the automatic market maker (AMM) used by Uniswap. SRM tokens have a low free float (only 3% of the circulating supply) and most of their supply is owned by FTX and Alameda. This resulted in a 70% price drop during the FTX crash.
Many DEXs have their own tokens that provide administrative rights, allow the collection of improvement proposals or funds in the community treasury, or have mechanisms to collect value in the form of requesting a percentage of the revenue generated by the protocol. For example, Uniswap's UNI token grants administrative rights, while Sushiswap's CRV Curve and SUSHI token grants administrative rights and requires fees to trade shares.
Since the FTX news broke in early November, UNI, CRV, and SUSHI DEX token prices have fallen 18%, 33%, and 25%, respectively. At the same time, Coinbase's share price fell 24% and recently hit a low of $40. Despite Coinbase being a public company and a U.S. regulated entity with much better regulations and risks than foreign exchanges, the market has penalized all cryptocurrency players. . centralized and decentralized.
Key statistics
Uniswap holds the largest market share among DEXs with 60% trading volume or $6.7 billion over the past seven days. They are followed by Curve ($2.4M), DODO ($1.1M), Balancer ($414M) and Sushiswap ($219M).
Forecasts and conclusions
The principle of the cryptocurrency industry is to allow users to use decentralized technologies to protect against the actions of risk-seeking intermediaries. The irony of the past few weeks is that centralized scams and opportunistic players in the cryptocurrency industry have highlighted the need for decentralized applications. Seemingly dishonest actions by FTX, Celsius, Blockfy, Voyager and other players led to the results that the technology tried to prevent.
With the explosion of centralized enterprises, decentralized applications and their underlying cryptographic protocols have served as blueprints. Decentralized finance (DeFi) applications are doing well, and the Bitcoin and Ethereum networks process transactions seamlessly. To avoid future disruptions and loss of client funds, the answer is to build on DeFi and make it easier for users to manage their assets and interact with decentralized applications.
While trading volumes have increased on the market-leading DEXs, their interfaces remain difficult to navigate and users are limited to a relatively small base of experienced traders and investors. To truly realize the potential of self-monitoring trading services and other DeFi applications, projects need to develop simple migration and security mechanisms.
Centralized exchanges are becoming dominant in terms of the number of users and trading volume. At the moment, Uniswap has about 4.5 million users. Since its launch last quarter, Coinbase has reached 108 million verified users, a 24x increase. We may start to see these numbers converge and eventually reverse as users learn about the benefits of DEX and the risks of working with a centralized provider.
decision point
As shocking as it is in terms of scale and potential contagion, FTX is the latest centralized exchange that has been embroiled in corrupt trading practices leading to bankruptcy and is probably not going to stop. Decentralized infrastructure can prevent such crises. DeFi is still in its infancy, and to take full advantage of the benefits the system has to offer, a more intuitive user interface and more education is needed.
Investors looking to access DeFi can purchase tokens on major DEXs such as UNI, CRV, and SUSHI, or purchase lending protocols such as Compound (COMP), Aave (AAVE), or Maker (MKR). Investors can share some of these assets to make a profit and receive a share of the income generated by the underlying protocol.
For users who choose which DEX to trade, Uniswap locks in maximum volume and total value, which means users typically experience less price slippage, the difference between the price the user sets and what they get. Aggregators like 1 Inch can be helpful for users to find the best price for an asset they want to trade, but they tend to over-trade certain trades resulting in higher fuel rates.
Several centralized exchanges have launched token exchanges such as FTT FTX, CRO Crypto.com, BNB Binance and LEO Bitfinex. These tokens are usually structured as pseudo-equity instruments where they burn the tokens with a portion of the income generated from the exchange, thus tying the value of the token to the performance of the exchange. These tokens can also offer additional benefits such as trading fee rebates for holders. Ultimately, these tokens should be viewed as a transactional risk trading investment, in which case the token becomes worthless.
At this stage, centralized exchanges still provide a convenient and simple user experience, a fiat ramp, and higher liquidity, but these are problems that DeFi applications can solve. However, users should be aware that DeFi applications still come with their own set of risks, such as potential regulatory risk, the risk of potential smart contract hacking, and it is the user's responsibility to properly manage their private keys.