Shift to DEXs from centralized exchanges.

Centralized exchanges have been dominating the cryptocurrency industry for over a decade, serving as the primary means of transferring value between blockchains and acting as a gateway for people to enter the world of crypto. They have played a crucial role in the early development of the crypto industry, with many earning substantial profits. For example, Binance’s revenue hit $12 billion in 2022, a ten-fold increase in just two years.

However, the success of centralized exchanges has come with a cost. Their dominance has placed an unnecessary financial burden on users, and their custodial nature has hindered the development of the Web3 ecosystem. Despite this, the growth of DeFi has happened despite the stranglehold of centralized exchanges, with users relying on non-custodial wallets to access even the most basic DeFi products.

Thankfully, the shift from centralized exchanges to DEXs (decentralized exchanges) is gaining momentum. After the SEC’s crackdown on Binance and Coinbase, DEX trading volumes surged 444%. Even without such seismic events, users are increasingly recognizing the value of DEXs. Uniswap trading volume has consistently outpaced that of Coinbase so far in 2023 before the SEC formally announced proceedings against the centralized exchange.

As crises continue to engulf centralized exchanges, the pendulum is increasingly swinging towards its decentralized counterparts. While centralized exchanges remain dominant in terms of market share for now, the growing interest in DEXs has great potential to upend the status quo and open up the full potential of the Web3 economy.

The collapse of FTX may have represented a low point for centralized exchanges, the culmination of years of questionable practices and declining trust. Ongoing criminal investigations, as well as the SEC’s continued probing into the likes of Binance and Coinbase, are only exacerbating the situation.

Against this backdrop, users are increasingly drawn to the transparent, trustless approach of DEXs. Even before the FTX saga, Uniswap had been diverting daily volume away from centralized exchanges, starting with ERC-20 token swaps.

Although the groundwork has been laid for significant upticks in the use of DEXs, on-chain trading beyond Uniswap and ERC-20 tokens has, so far, struggled to gain traction.

As cross-chain technology matures, users will recognize that a DEX world may offer exactly what they’re looking for: secure, transparent, and user-friendly transactions without the need to trust a centralized entity. There is no reason why the Uniswap Effect cannot be replicated in most crypto spot markets, echoing the 2020 ERC-20 token swap revolution.

Since 2020, many new DEXs have come and gone. The automated market maker (AMM) concept has led to the development of many complex markets involving stablecoins, liquidity provision, yield farming, and many more alongside the simple concept of swapping tokens. Breaking into the DeFi market has become much more challenging with so many products competing for attention and liquidity.

In 2023, the landscape cares far less about liquidity than it once did. The focus of any new DeFi product, but especially a DEX, is having a competitive edge for end-users, with pricing and gas fees being the two most important factors for swappers given the dominance of aggregation rising by the day. End-users drive volume and fees, which in turn drive liquidity.

It is a common error to assume that liquidity will just be there. What we’ve seen is that without a compelling reason for traders to use a platform, liquidity will eventually disappear. All new DEXs should ask themselves the crucial question: What can we do to make this protocol useful to Web3 users sustainably? Without answering this, any early incentives used to pump liquidity will simply dry up, and protocols are then faced with the realities of the competitive landscape.

As we approach the second half of 2023, users will probably be surprised by the speed at which swapping experiences are improving. With the continuous evolution of cross-chain swapping, centralized exchanges will need to put in more effort to attract and keep users. It will be increasingly difficult when compared to DeFi exchanges that offer greater safety, cost competitiveness, and complete transparency. The embedded trust of decentralization will be an added bonus.

Ultimately, trading volume is unstable and will naturally flow to where the best user experience and value exist. Uniswap has already demonstrated that on-chain trading can be a compelling alternative to the current status quo. The industry must now work quickly to unlock the full potential of this technology. As this happens, the momentum of the shift from centralized exchanges to DEXs will only continue to strengthen.

Simon Harman is the CEO and Founder of Chainflip Labs , a cross-chain decentralized exchange set to launch in mid-2023.

This article was published through Cointelegraph Innovation Circle, a verified organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration, and thought leadership. Opinions expressed in this article do not necessarily reflect those of Cointelegraph.

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