Along with the DeFi (Decentralized Finance) boom that has been growing wildly in the blockchain industry in 2020, decentralized exchanges have taken advantage of the rapid rise and are starting to come to the forefront of more and more people’s minds. Decentralized Exchange, or Decentralized Exchange (DEX), refers to an exchange that runs on a blockchain network. Most decentralized exchanges are built on the ethereum blockchain, and a small number are based on the Coinan smart chain, for example.
So what level of development has DEX reached so far compared to centralized cryptocurrency exchanges (CEX) like Coinan and Hotcoin? What problems does it face? All of these will be explored in this article.
The difference between DEX and CEX
So, what are the differences between the two compared to the traditional CEX? This section will answer this question from three perspectives.
From a digital asset perspective, trading in a traditional CEX requires the user to keep the assets in the exchange’s wallet; whereas if the user chooses to use DEX, then the trading assets can be kept in the user’s own wallet. From a technical perspective, CEX handles transactions off-chain; whereas DEX implements transactions through smart contracts on-chain. Finally, from a governance model perspective, CEX uses the same governance model as a traditional enterprise; whereas DEX’s governance comes with open and community-driven attributes.
What are the advantages of DEX?
In addition to the self-sustaining nature of user assets mentioned above, DEX is also more convenient to use compared to centralized exchanges. Because users do not need to perform a series of operations such as registration and real name, they only need to connect to their personal blockchain wallet. Users can also enable token trading without a license. Anyone can go live with their tokens in DEX without any licensing or regulations, and without a coin upload fee.
Volume Locked (TVL)
A term we often use in the DeFi space: TVL (Total Value Locked), which broadly refers to the total value of digital assets pledged by users in a DeFi project. Also, we often use TVL to measure the growth of a DeFi project.
According to DeFi Pulse, DeFi’s TVL is $64.45 billion as of June 1, 2021. And at the beginning of June 2020, the DeFi ecosystem’s TVL was around $1 billion, meaning that value soared more than 60 times in one year, and that momentum will continue to build.
The most frequently used and most engaged user in the DeFi ecosystem is DEX. As of June 1, DEX’s total lock volume reached $19.71 billion, accounting for more than 30% of the entire DeFi space and an almost 20-fold increase from the $103 million TVL at the beginning of June 2020.
Of the total lock-in volume of decentralized exchanges, Uniswap reached $6.7 billion, accounting for 33.99% of the total, leading the category. It was followed by Curve Finance ($6.15 billion in lockups), SushiSwap ($3.37 billion), Bancor ($1.46 billion) and Balancer ($1.44 billion). In contrast, none of the other decentralized exchanges had a total locked position of more than $200 million.
As of June 1, Ether’s market cap was close to $295 billion, while Bitcoin’s market cap was about $670 billion. And the combined TVL of the top five decentralized exchanges in terms of lock-in volume is about $19.1 billion, which is less than 7% of Ether’s market cap and 3% of Bitcoin’s market cap.
Furthermore, according to DeBank data, as of June 1, the top 10 projects in the DeFi ecosystem in terms of total market cap were LINK (market cap of about $29.5 billion), UNI ($26.7 billion), AAVE ($5.9 billion), 1INCH ($4.6 billion), COMP ($4.2 billion), RSR ($3.7 billion), MKR ($3.5 billion ), SNX ($2.8 billion), CRV ($2.7 billion), and SUSHI ($2.5 billion) (as shown in the chart below). Their combined market capitalization is approximately $86.1 billion.
By comparing the above data, we can see that both the lock-up volume of DEX and the token market cap of DeFi’s well-known projects are still at a relatively small volume compared to the more mainstream cryptocurrencies. Therefore, despite the booming growth of DeFi (including DEX) since 2020, the overall size of DEX, and even DeFi, is still relatively small compared to the market cap of mainstream cryptocurrencies (Bitcoin and Ether, etc.).
Overall, both the total lockup of the entire DeFi ecosystem and the total lockup of DEX have been in high gear since the middle of 2020, and have shown a linear, explosive growth trend since 2021. Although this trend dropped significantly after the recent 519 market crash, both values are still at historical highs overall. It is believed that with the further improvement of the DeFi ecosystem and the improved performance of decentralized exchanges, the sector can see further growth and prosperity in the future.
In the DeFi ecosystem, the last 24 hours of trading volume of decentralized exchanges is often seen by industry insiders as an important indicator to observe the development of DeFi.
According to DeBank’s data, trading volume on decentralized exchanges was around $20 million at the beginning of June 2020 and entered an explosive phase at the end of last year and the beginning of this year. On May 19, 2020, trading volume peaked at a high of $21,073 million per day. After the waterfall of 519, the last 24 hours of trading volume on decentralized exchanges is now (as of June 1) at $4.42 billion, about 1/5 of the peak. although the volume has fallen back, it is still at a high level compared to before April of this year.
Moreover, according to CoinGecko data, as of June 1, 2021 at 2200 hours (as shown in the chart below), Mdex leads with almost $2.5 billion in recent 24-hour trading volume of approximately $2.498 billion. The second to fifth places are Uniswap V3 (about $1 billion), PancakeSwap V2 (about $693 million), Uniswap V2 (about $661 million) and SushiSwap (about $356 million), respectively.
Notably, Uniswap’s most recent 24-hour trading volume had reached $426 million on August 30, 2020, the first time it surpassed centralized exchange Coinbase’s $346 million.
And during the same time period, the 24-hour trading volumes of several major centralized exchanges were as follows: Coinan (~$27.8 billion), Firecoin (~$8.1 billion), Coinbase (~$3.9 billion), Kraken (~$1.7 billion), Bitfinex (~$860 million), bitFlyer ($347 million), Gemini (~$200 billion USD).
Thus, it seems that while DEX’s trading volume accounts for a relatively small amount of spot trading volume compared to leading exchanges such as Cryptocurrency, it still cannot be expected to do so in the near future. However, the trajectory of DEX is positive and is starting to develop an overall comparable trading volume to some of the other major centralized exchanges. As such, we can expect this dynamic to continue to be consolidated and strengthened in the future as DeFi grows further.
Moreover, according to Glassnode data, the number of addresses of Ether has exceeded 112 million, and the number of active addresses has exceeded 700,000, so more and more users will flock to decentralized exchanges. We believe that DEX still has a long way to go to be on par with the centralized exchanges, but this day is not far away.
Current Problems with DEX
This section looks at the problems from a hands-on user perspective. First, the speed of trading is slow. Most of the current DEX are based on the ethereum blockchain. And it takes 12 seconds for the Ethernet blockchain to pack a block, which means it takes at least 12 seconds for a transaction to be confirmed. And when the transaction volume increases, it may cause network congestion, and then the longer it takes.
Second, cross-chain exchange is immature. At present, most of the DEX are unable to conduct cross-chain transactions (such as directly exchanging ETH for BTC), but developers have found ways to anchor BTC to the ethereum blockchain first (e.g. WBTC, imBTC, etc.), so that users can exchange BTC with ETH on decentralized exchanges.
Furthermore, the transaction process is relatively cumbersome. Compared to CEX, the steps involved in the DEX transaction process are more cumbersome. For users who are already accustomed to various easy-to-use Internet applications, the threshold for using DEX seems higher.
In addition, using DEX requires a high level of security awareness. When users hold their own private keys, although they do not need to trust a third party, this also means that they need to keep their private keys or helper words and other backups properly, and bear the loss caused by the loss or leakage of their private keys independently.
Finally, the liquidity is relatively poor. Decentralized exchanges have a small number of users and poor asset liquidity, resulting in platforms that cannot provide the depth of transactions that users need.
To solve these problems, users are the foundation, and only a large enough user base can generate enough transactions for the problem of poor asset liquidity to be improved. In addition, the improvement of performance is another key factor. A decentralized exchange with better performance, such as faster transactions and greater throughput, is likely to stand out among similar projects.
DEX offers a new way for new projects to go live with their tokens without having to go through the strict, restrictive uplisting process of a centralized exchange. It also gives CEX the opportunity to review the project’s operations before it goes live for more mainstream users. While true DEX products are still in their infancy, with low trading volumes and a lack of liquidity making it more inconvenient to use them, they have more transparent data and fairer rules.
As DeFi further develops and succeeds, decentralized trading of assets will surely be one of the steps. After all, asset exchange is an immediate need in the digital economy, and DEX will assist in enabling the transfer of asset value. Therefore, DEX is crucial to the development of the blockchain industry and represents a new wave of innovation and development to come.
Compared to the more traditional CEX, DEX is more like a schoolboy in a child’s age, whose development is just beginning, but with a bright future. When some of the constraints mentioned above are addressed, I believe DEX will see a more comprehensive explosion in its development.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/decentralized-exchange-two-key-data-interpretation-lock-volume-and-trading-volume/
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