With the rapid development of DeFi (decentralized finance, full name Decentralized Finance) boom in the blockchain industry in 2020, decentralized exchanges have also taken advantage of the rapid rise and began to enter the field of vision of more and more people. Decentralized exchange, the full name of Decentralized Exchange (DEX), refers to the exchange running on the blockchain network. Most decentralized exchanges are built on the Ethereum blockchain, and a small number are based on Binance Smart Chain, etc.

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The difference between DEX and CEX

So, compared with the traditional CEX, what are the differences between the two? This part will answer this question from three angles.

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What are the advantages of DEX?

Locked amount (TVL)

Locked amount (TVL)

In the field of DeFi, we often use a term: TVL (Total Value Locked, that is, the total locked value), which generally refers to the total value of digital assets mortgaged by users in a DeFi project. At the same time, we often use TVL to measure the development of a DeFi project.

According to DeFi Pulse data, as of June 1, 2021, the TVL of DeFi is 64.45 billion US dollars. At the beginning of June 2020, the TVL of the DeFi ecosystem was around US$1 billion, which means that this value has soared more than 60 times within a year, and this momentum will continue.

In the DeFi ecosystem, DEX is the most frequently used and the largest number of participating users. As of June 1, the total lock-up volume of DEX reached 19.71 billion US dollars, accounting for more than 30% of the entire DeFi field, an increase of nearly 20 times compared with the TVL of 103 million US dollars in early June 2020.

Among them, Uniswap reached US$6.7 billion in total locked positions on decentralized exchanges, accounting for 33.99%, ranking first among its peers. It is followed by Curve Finance ($6.15 billion locked), SushiSwap ($3.37 billion locked), Bancor ($1.46 billion) and Balancer ($1.44 billion). The total lock-up volume of other decentralized exchanges has not exceeded 200 million US dollars.

As of June 1, ethereum's market capitalization was close to $295 billion, while bitcoin's market capitalization was about $670 billion. The total TVL of the top five decentralized exchanges with locked positions is about 19.1 billion US dollars, which is less than 7% of the market value of Ethereum and 3% of the market value of Bitcoin.

Furthermore, according to DeBank data, as of June 1, the top ten projects in the DeFi ecosystem by total market capitalization are LINK (market capitalization of about 29.5 billion U.S. dollars), UNI (26.7 billion U.S. dollars), and AAVE (5.9 billion U.S. dollars) , 1INCH ($4.6 billion), COMP ($4.2 billion), RSR ($3.7 billion), MKR ($3.5 billion), SNX ($2.8 billion), CRV ($2.7 billion), SUSHI ($2.5 billion) ( As shown below). Their combined market capitalization is about $86.1 billion.

Through the comparison of the above data, we can find that, compared with the more mainstream cryptocurrencies, whether it is the locked amount of DEX or the market value of tokens of well-known DeFi projects, they are still in a relatively small volume. Therefore, although DeFi (including DEX) has flourished since 2020, compared with the market capitalization of mainstream cryptocurrencies (Bitcoin and Ethereum, etc.), the overall size of DEX and even DeFi is still relatively small.

Trading volume

Trading volume

In the DeFi ecosystem, the recent 24-hour trading volume of decentralized exchanges is often regarded by industry insiders as an important indicator for observing the development of DeFi.

According to DeBank data, the trading volume of decentralized exchanges was about 20 million US dollars in early June 2020, and entered an explosive stage at the end of last year and the beginning of this year. On May 19, 2020, the trading volume peaked, with the highest daily trading volume reaching $21.073 billion. After experiencing the 519 waterfall market, at present (as of June 1), the recent 24-hour trading volume of decentralized exchanges is 4.42 billion US dollars, accounting for about 1/5 of the peak. Although the transaction volume has dropped, compared with before April this year, the value is still at a relatively high level.

In addition, according to CoinGecko data, as of 22:00 on June 1, 2021 (as shown in the figure below), the trading volume of Mdex in the last 24 hours was nearly 2.5 billion US dollars, approximately 2.498 billion US dollars, ranking first. The second to fifth places are Uniswap V3 (approximately US$1 billion), PancakeSwap V2 (approximately US$693 million), Uniswap V2 (approximately US$661 million) and SushiSwap (approximately US$356 million).

It is worth noting that the recent 24-hour trading volume of Uniswap reached 426 million US dollars on August 30, 2020. This is the first time that it surpassed the 346 million US dollars of the centralized exchange Coinbase.

At the same time, the 24-hour trading volumes of several major centralized exchanges are as follows: Binance (approximately 27.8 billion U.S. dollars), Huobi (approximately 8.1 billion U.S. dollars), Coinbase (approximately 3.9 billion U.S. dollars), Kraken (approximately 1.7 billion U.S. dollars) USD), Bitfinex (approximately USD 860 million), bitFlyer (approximately USD 347 million), Gemini (approximately USD 200 million).

From this point of view, although the trading volume of DEX is relatively small compared with leading exchanges such as Binance, the spot trading volume is still relatively small, and it is still not comparable in the near future. But the trajectory of DEX is positive, and compared to the trading volume of some other mainstream centralized exchanges, the overall situation is starting to match it. Therefore, we can foresee that this trend will continue to be consolidated and strengthened in the future with the further development of DeFi.

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Current problems of DEX

This part mainly looks at the problem from the perspective of user operation. First, transactions are slower. Most of the current DEXs are based on the Ethereum blockchain. It takes 12 seconds for the Ethereum blockchain to package a block, which means that a transaction needs at least 12 seconds to be confirmed. And when the transaction volume increases, it may cause network congestion, and the time required will be longer.

Second, cross-chain exchange is immature. At present, most DEXs are unable to conduct cross-chain transactions (such as directly exchanging ETH for BTC), but developers have found ways to anchor BTC cross-chain to the Ethereum blockchain (such as: WBTC, imBTC, etc.), In this way, users can exchange ETH for BTC on decentralized exchanges.

Furthermore, the transaction process is relatively cumbersome. Compared with CEX, the steps involved in the transaction process of DEX are more cumbersome. For users who are accustomed to various convenient Internet applications, the threshold for using DEX seems to be higher.

In addition, the use of DEX also requires a high level of security awareness. When the user owns the private key, although there is no need to trust a third party, it also means that the user needs to take good care of backups such as his private key or mnemonic words, and bear the losses caused by the loss or leakage of the private key.

Finally, liquidity is relatively poor. The number of users of decentralized exchanges is small, and the liquidity of assets is poor, which makes the platform unable to provide the trading depth required by users.

Summarize

Summarize

DEXs offer a new way for new projects to list their tokens without going through the strict, restrictive listing process of centralized exchanges. This also gives CEXs the opportunity to review how the project is functioning before listing coins for more mainstream users. While true DEX offerings are still in their infancy, with low trading volume and a lack of liquidity making using them more inconvenient, their data is more transparent and the rules are fairer.

With the further development and success of DeFi, the decentralized exchange of assets is bound to be one of them. After all, asset exchange is just needed in the digital economy, and DEX will assist in realizing the value transfer of assets. Therefore, DEX is crucial to the development of the blockchain industry and represents an upcoming new wave of innovation and development.

Compared with the more traditional CEX, DEX is more like a primary school student in childhood. Its development has just begun, but the future is bright. When some of the limiting factors mentioned above are resolved, it is believed that the development of DEX will usher in a more comprehensive explosion.