What changes has the recent popularity of DeFi brought to Ethereum?

Recent developments in decentralized finance (DeFi) have demonstrated Ethereum's potential as the infrastructure foundation for advanced P2P financial systems. How has this affected the liquidity of the asset over the past few months? Much of the recent focus has been on the role of ETH on decentralized exchanges like Uniswap, but by studying liquidity on centralized exchanges, we can better understand how professional market makers have absorbed prices over the past month changing.

We can observe a sharp drop in market depth as the price of ETH started to rise towards the end of July, which is expected behavior during price volatility as market makers adjust positions to increase risk. However, the sharp decline in market depth cannot be fully explained by price volatility, and may be related to the growth of ETH liquidity pools on decentralized exchanges, which may draw funds from centralized exchanges. At the same time, we have also seen a sharp increase in ETH transaction fees.

Liquidity is defined as the degree to which an asset can be quickly bought or sold in the market at a stable price that ultimately reflects the asset's intrinsic value. The more liquid an asset is, the easier it is for the natural process of price discovery to occur, ultimately making the market more efficient.

Depth of market decreased. Market depth refers to the sum of buys and offers on the order book and is directly related to the liquidity of a trading pair. In general, the greater the depth of the market, the more liquid the asset is because it is easier to exchange at a stable price with minimal slippage.

We can observe a sharp drop in market depth as the price of ETH started to rise towards the end of July, which is expected behavior during price volatility as market makers adjust positions to increase risk. However, the sharp decline in market depth cannot be fully explained by price volatility, and may be related to the growth of ETH liquidity pools on decentralized exchanges, which may draw funds from centralized exchanges. At the same time, we have also seen a sharp increase in ETH transaction fees.

For most of the summer, as price volatility dropped across all cryptocurrency markets, so did ETH spreads. However, this caused the spread to start widening towards the end of July as ETH experienced a mini bull run. Market makers widen the spread to account for more risks during volatility. We can observe that since July, the spread has remained volatile, which corresponds to the continuous price movement triggered by events in the DeFi space.

Summarize

Slippage remains low. Price slippage is closely related to market depth and measures the difference between the expected price of a trade and the price level reached after the trade is executed. High price slippage usually indicates an illiquid market. Following the market crash in March, most ETH trading pairs saw above-average price slippage in May. However, slippage has remained relatively low since mid-June, only picking up slightly during the late-summer price swings.