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Trading volume surges on decentralized exchanges

#crypto #bitcoin

Data from blockchain analytics firm Dune shows trading volume on decentralized exchanges has surged in recent weeks — up 130 percent in the last seven days alone. This sudden move concludes a growth year for decentralized trading, with the number of transactions made on DEXs tripling since January according to a July study by Data science DAO D5.

The bulk of this growth has been captured by decentralized trading protocols Kyber Network and Uniswap, which between them have traded almost $50 million in the last week.

These protocols, along with others like Bancor that are not supported by Dune, are benefiting from several trends in the cryptocurrency ecosystem, including the growing popularity of liquidity pools and the fast rise of decentralized finance (DeFi).

Pooling liquidity

The clunky trading mechanisms of the first generation of decentralized exchanges created a frustrating experience for users.

Though the blockchain-based trading process provided security, the platforms were bottlenecked by the maximum transactions per second on the Ethereum blockchain, meaning only the most adventurous traders attempted to use them. Traders were faced with slippage, high spreads, and all the problems associated with low levels of liquidity.

Over the last two years, Uniswap and Kyber have created shared liquidity pools that help address these issues.

The pools are essentially just groups of tokens sitting in smart contracts, which are drawn from multiple platforms and protocols, and can be seamlessly shared between them. This pushes up the available liquidity on any single platform meaning that traders can enjoy the security and low fees of decentralized exchanges while bypassing the problem of low liquidity. Traders are able to scan multiple dexes to find the best price to buy or sell a token, or split a single large order across multiple platforms to minimize slippage.

And as more applications join and the ecosystem grows, each protocol gets a larger slice of the ever-expanding pie.

Along with countless smaller projects like Fund Management protocols MoatFund and BeToken, several of the biggest names in cryptocurrency have linked up with KyberNetwork to benefit from the ability to easily swap ERC-20 tokens, and the fees earned by providing liquidity.

HTC's Exodus smartphone wallet, the Zion Vault, integrated the Kyber Network protocol in May, with Binance’s Trust Wallet following in July. In September, KyberSwap added another source of liquidity with a fiat-to-crypto gateway allowing traders to buy Ethereum with credit cards.

Uniswap, which is often thought of as a simplified version of the competing Bancor protocol, has gained popularity for many of the same reasons as Kyber, but has a unique feature that some suggest gives the protocol an edge over its competitors. As well as allowing apps on Ethereum to share liquidity, and allowing liquidity providers to earn fees from trades by adding tokens to liquidity pools, Uniswap also has a unique algorithmic pricing mechanism that guarantees liquidity and low spreads.

The DeFi effect

One of the biggest boons to decentralized exchanges is DeFi, which has provided a steady stream of decentralized applications to deliver much-needed liquidity.

"It feels like the bigger and better our DeFi swiss army knife gets, the stronger we can compete with conventional finance," says Kyber's August Ecosystem report.

And the positive feedback loop works both ways. In the August update, Kyber revealed that after joining the Kyber Network, decentralized lending and margin trading platform Fulcrum managed to grow its Kyber volume to $1.4 million in just two months.

But while the growth is impressive, it also highlights the difficulty of accurately monitoring the performance of individual protocols in an ecosystem that is increasingly intertwined. The constant sharing of liquidity inflates growth statistics and makes it difficult to assess each protocol individually.

As crypto research firm Delphi Digital pointed out in June, Kyber Network added Uniswap as one of its liquidity reserves in February, and in the following month trades sourced through Kyber made up 34% of Uniswap’s total trading volume. This suggests that, while the two protocols are likely to be experiencing significant growth, the figures may be exaggerated by the large amount of volume shared between them.

Either way, it’s encouraging to see decentralized exchanges and the DeFi ecosystem continue to gain momentum.



Kieran Smith, Khareem Sudlow