- Decentralized exchanges are currently in a relatively nascent stage in comparison with established centralized exchanges such as Binance.
- However, their growth has surged in the recent years leading to remarkable liquidity inflows.
- Uniswap’s ease-of-use and popularity is touted to be the prime factor behind rising volumes of trades.
Ever since the introduction of Bitcoin, innovation in the FinTech sector is continuously growing at a steady pace. One of the newest and possibly radical additions to the fore is the rise of Decentralized Exchanges (DEXs) which were introduced to tackle their counterparts’ inherent drawbacks.
The paradox of centralized exchanges
Bitcoins and other cryptos were introduced as an alternative to the completely centralized system of economic architecture. However, all trades and transactions involving cryptos had to be facilitated via centralized systems, which is an astounding paradox and obviously detrimental to the distributed nature of the very entity they are handling. Moreover, they also suffer from single point of failure problems, not to mention that they are also heavily dependent on third party web services which opens up a host of new vulnerabilities.
DEXs were designed with an aim to tackle these issues.
Rise of Uniswap protocol
Built on the Ethereum blockchain, the Uniswap protocol was established with an aim to decentralize trades based on smart contracts and thereby improve market efficiency. It quickly became popular among enthusiasts and is currently the fourth-largest crypto exchange by volume.
In a report by Rahul Rai from Messari, it is estimated that the quantity of collateral currently locked up in DEXs is nearing all time highs of about $10 billion. The report also stated that trading in DEXs peaked at about $72 billion in February this year. Most of the activity is occurring in Uniswap which accounts for more than half of the total liquidity pool currently encapsulated by DEXs. It can boast of hosting close to $6.5 billion in weekly transactions which translates to roughly 62.2% of all Ethereum based DEXs, according to a report. It’s primary competitor, SushiSwap, forked from Uniswap in late 2020, controls roughly 15.2% or about $1.6 billion in weekly transactions. Curve Finance is at a distant third with roughly $647 million or 6.2% in this sector. Aggregators such as 1inch exchange have already amassed over $1 billion in trade volumes in this week alone.
Though DEXs suffer from some drawbacks including capital efficiency and multi-token exposure, DeFi aggregators are growing at an unparalleled rate with current trade volumes already greater than the whole of 2020. This trend is expected to continue this year too.
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