The latest report from Chainalysis found that decentralized exchanges (DEXs) have outperformed centralized exchanges (CEXs) in terms of on-chain transaction volume since January 2021. However, to maintain its lead in market share, DEXs may need to resolve a set of issues, including regulatory scrutiny in the future.
DEX Vs. CEX
Since CEXs typically adopt an “order book” system that enables off-chain transactions, on-chain transactions only account for a relatively small percentage of their total volume. In contrast, DEXs rely on smart contracts to automatically execute recorded trades on the blockchain.
Chainalysis reports that $175 billion worth of cryptocurrency was sent on-chain to the CEX from April 2021 to April 2022 – far less than the $224 billion sent to the DEX during the same period. Furthermore, their dominance of on-chain transactions reached its peak last June, accounting for over 75% of total volume, with the rise of DeFi fueling the usefulness of DEXs.
As DeFi activity eased with a relatively bearish outlook in the broader market, the two types of exchanges nearly split their current market share, with “55% occurring on the DEX and 45% on the CEX.” Furthermore, the overall on-chain activities are highly contingent on the market conditions.
“CEX trading volume reached an all-time high at the end of 2017 as bitcoin climbed to its all-time high. Similarly, DEX and CEX trading volume skyrocketed similarly in 2021 as cryptocurrency prices rebound. Grown up.”
The report also shows that on-chain transactions are more focused on the top five DEXs than the top five CEXs from April 2021 to April 2022. Uniswap, SushiSwap, Curve, dYdX, and 0x protocols account for 85% of the volume. Happening on the DEX, and Binance.com, OKX.com, Coinbase.com, Gemini.com, and FTX.com all support only 50% of on-chain CEX trading volume.
The report credits the DEX’s internal mechanisms for supporting such a concentration trend:
“DEXs with higher liquidity may be able to provide more stable pricing for even the largest market participants, but smaller pools may struggle to do so without significant price drops – a challenge for both consumers and liquidity providers. tempting offer.”
The future ahead of DEX
According to the report, there are mainly three factors that determine whether a DEX can maintain the lead.
The low transaction fees and fair token pricing can be great incentives for users to choose the DEX over the CEX. Furthermore, emerging as a self-custodial and programmatic way of trading cryptocurrencies, DEXs need to find a way to convince mainstream investors to “favour further automation, arbitrage and self-custodial”.
Last but not least, regulatory scrutiny could be a major challenge ahead for decentralized trading platforms. Chainalysis economist Ethan McMahon reportedly said that as the sector continues to grow in popularity, it could attract the attention of watchdogs, which could lead to a drop in its market share.
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