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Cryptocurrency enthusiasts once believed that peer-to-peer trading venues like Uniswap and dYdX would experience a boom after the collapse of the FTX exchange in November. The collapse eroded trust in centralized platforms, prompting predictions of a golden period for decentralized platforms that operate through blockchain-based smart contracts, allowing users to retain custody of their tokens without the involvement of intermediaries.
However, these expectations have not been met. Decentralized exchanges have seen a significant drop in monthly spot trading volumes, declining by 76% to $21 billion by June this year compared to January 2022. This decrease is more pronounced than the 69% drop experienced by their centralized counterparts, which recorded trading volumes of $429 billion during the same period, according to Kaiko data. Based on the most recent data, the market share of peer-to-peer digital-asset platforms has declined from its peak of 7% achieved in March 2023 to 5%.
While decentralized platforms attract crypto enthusiasts who prefer to avoid traditional financial intermediaries, they face challenges such as complex user interfaces, slower transaction speeds, and lower liquidity when compared to major centralized venues like Binance Holdings Ltd. or Coinbase Global Inc. Institutional investors, in particular, find it challenging or infeasible to conduct trades on peer-to-peer exchanges. Despite these hurdles, Richard Galvin, co-founder at Digital Asset Capital Management, remains optimistic, stating that the design of these platforms is continuously improving, even though most of them are less than three years old.
Efforts have been made to improve services and attract more users to decentralized exchanges. For instance, Uniswap, the largest decentralized trading venue, recently introduced a new protocol aiming to enhance prices for clients by aggregating digital-asset liquidity from various sources. Additionally, blockchain firm Vertex launched a decentralized exchange earlier this year, claiming to offer comparable transaction speeds to centralized platforms.
Although trading volumes have declined, the number of monthly active users on decentralized exchanges has steadily increased since 2020, consistently surpassing one million for most of this year, according to Token Terminal data. This rise in users might be attributed to growing concerns about the future of centralized platforms following the bankruptcy of FTX amid allegations of massive fraud, prompting greater scrutiny from regulatory authorities.
Karan Ambwani, India lead for dYdX, points out that more investors are exploring decentralized exchanges as a way to mitigate custody and counterparty risks. However, expanding the user base could become more challenging due to indications that traditional financial firms are now eyeing opportunities in the cryptocurrency market, especially as it recovers from the $1.5 trillion downturn in 2022.
One such example is the institutional-only crypto exchange, EDX Markets, which was launched last month with backing from major firms like Citadel Securities, Fidelity Digital Assets, and Charles Schwab Corp. Yves Longchamp, head of research at Seba Bank AG, believes that the entry of major traditional players from the finance sector might initially boost centralized-exchange volumes, but could eventually lead to increased volumes across decentralized exchanges due to a surge in overall demand for cryptocurrencies.
