What is the prospect of decentralized exchanges?

Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley), Author: Mika Honkasalo, translation: Liam, reproduced by Odaily with authorization.

Editor's Note: This article comes from

• Crypto Valley Live (ID: cryptovalley)

• Crypto Valley Live (ID: cryptovalley)

• , Author: Mika Honkasalo, translation: Liam, reproduced by Odaily with authorization.

secondary title

Over the past 30 days, the average daily trading volume on the decentralized exchange has reached $46.2 million.

Source: Dune Analytics

Decentralized exchanges may be the biggest success story in open finance in 2020.

Approximately $1.38 billion was traded on decentralized exchanges in the past 30 days. Over the past 18 months, decentralized exchanges have seen an average monthly growth rate of 32%.

image description

Source: Dune Analytics

Although decentralized exchanges account for less than 1% of spot trading volume compared to centralized exchanges, their development trajectory is positive. New technologies that improve the scalability of decentralized exchanges can help increase their competitiveness relative to centralized exchanges.

image description

Source: Coingecko, CryptoCompare

Liquidity pools are an easier method of obtaining liquidity than order books because market makers only need to broadcast a trade once when liquidity is deposited into the pool. The downside is that this model may incur higher slippage costs for users, as prices are determined through constant function equations rather than order matching directly.

Source: The Block Research

In order to solve this problem, the decentralized exchange based on the liquidity pool optimizes the functions and parameters of asset storage.

For example, Curve uses a pricing formula optimized for pairs of assets that are relatively stable with respect to each other (e.g., stablecoin-to-stablecoin conversions). Balancer gives liquidity providers more control over which assets and how many are in those pools, and pool owners can customize fees to make providing liquidity more attractive.

image description

Source: The Block Research

secondary title

Are tokens valuable?

Clearly, the decentralized exchange of assets will be one step if open finance is to succeed.

One way to describe a centralized exchange is an intermediary-free version of a traditional exchange, where the middleman is cut out and buyers and sellers can trade freely. Typically, there are no registration fees or qualification requirements for new trading pairs other than exceeding technical standards. Decentralized exchanges cannot be used to bring fiat currencies into the cryptocurrency ecosystem, but once assets are on the blockchain, they can be freely traded on any decentralized exchange.

Decentralized exchanges may also separate traditional exchange operations into many different services. The result of this is that many of the revenue streams that traditional exchanges have had are cut out. Unlike traditional exchanges, decentralized exchanges do not have proprietary trading software as a source of income, because anyone can build their own exchange interface on top of one of the protocols. Likewise, the feed of data is completely trustworthy due to the transparent nature provided by the blockchain. And anyone is free to build value-added services on top.

Today, there is a considerable discrepancy between the fees charged by token holders of decentralized exchange protocols themselves. Over the past month, 0x has achieved an average daily transaction volume of $3.44 million, while Kyber Network has recorded a transaction volume of $3.61 million. However, at the current exchange rate of 0x, when token holders stake their tokens on the market maker, they are paid about $2,000 per month, and in the past 30 days, 199,366 KNC tokens have been burned, according to the current The price calculation is worth $235,000.

Overall, protocol fees for token holders and market makers on 0x totaled $15,000 over the past month.

This means that KNC is worth 75 times its annual earnings compared to ZRX at 8,900. This situation persisted, with roughly the same transaction volume for both agreements.

image description

Source: Block Research

Decentralized exchanges are still in their infancy, which is why direct benefit comparisons in this way mean little. Once a protocol matures, it will be impossible to provide nearly the exact same service while being 100x as valuable as another protocol.

Fees (either through token burns or dividends) are additional expenses that traders must incur.

Uniswap v2, which launched in May 2020, now has the option to enable 5bp fees. This fee will be deducted from the 30 basis points that liquidity providers currently earn per trade, or if tokens are issued, will be paid directly to Uniswap’s development team or token holders. This means that liquidity providers give back one-sixth of their earnings to token holders. This fee has benefits for the protocol, such as paying for ongoing development, but also increases the incentive for liquidity providers to fork and modify the protocol to maintain these profits. Compared to the enormous difficulty of proposing an exchange in the real world, any developer can launch a decentralized exchange to people across the globe from day one.