Uniswap recently outperformed Coinbase Pro in trading volume, surpassing one of the most popular centralized exchanges in the space, after reaching around $500 million in daily volume.
Although Coinbase Pro is by no means the largest exchange in existence, it appears that the decentralized sector is catching up with traditional platforms for cryptomoney trading.
Uniswap is a decentralized exchange and automated liquidity protocol where users can buy and sell ERC-20 tokens and provide liquidity to earn commissions on the exchanges. This means that the more volume traded on the platform, the more rewards liquidity providers will receive. The growing volume and therefore increasing rewards explain why the total blocked value of Uniswap is increasing so much, currently standing at about $1.45 billion, making it the largest decentralized financial protocol in existence, according to DeFi Pulse data.
Although decentralized exchanges have been around for a long time, traditional centralized exchanges have always been more popular for several reasons, the main one being that they are more convenient. However, as technology advances, DEXs are becoming more sophisticated and easier to use. Below, we take a closer look at decentralized exchanges and what they have to offer the crypto community and beyond.
Popular DEX Types and Implementations
There are several types of decentralized exchanges, with different implementations that are based on different networks. Among the most popular examples are the already mentioned Uniswap, which is an Ethereum-based DEX, as well as Curve, dYdX, EtherDelta, Waves and many others.
Uniswap is an automated market maker, which means that trades are automatically organized through intelligent contracts that draw funds from the aforementioned liquidity pools. This means that there is always liquidity for trading, but that the exchange itself is quite limited. While Uniswap (and its fork, SushiSwap) allows users to trade all types of ERC-20 tokens, Curve focuses on stablecoins, offering traders an extremely low spread, which is not always the case with all stablecoins that may have low liquidity.
While protocols such as Uniswap and Curve have become popular, 0x and EtherDelta were previously the most popular decentralized exchanges at Ethereum, although they are more like a typical exchange, with traditional order books but fed entirely with smart contracts on the Ethereum Blockchain.
Why are decentralized exchanges becoming popular?
Generally speaking, decentralized exchanges are becoming popular for the same reason people like Bitcoin (BTC): They don’t depend on any third party, so users control their funds at all times simply by connecting their wallet and signing the transaction. As long as the smart contract is secure, there’s virtually no way for anyone to appropriate the funds.
Chinese exchanges suffer as their users chase the profits of the DeFi sector
As such, decentralized exchanges are, in theory, impervious to hackers, although DeFi’s liquidity pools have been diverted before. Since there is no centralized party involved, there is also no need to provide any additional information or documents or to go through any „Know Your Customer“ verification procedure.
It should also be noted that DEX does not allow users to cash money in fiat currencies, only stablecoins. In addition, because these protocols are decentralized, there have been some problems with people adding fake tokens to exchanges. In particular, Uniswap does not have any token rules. However, DEXs have gained tremendous popularity. About Yavin, founder of Cointelligence and author of The Cointelligence Guide to Decentralized Finance, told Cointelegraph
„We are in the midst of another financial crisis during the year 2020 because of the coronavirus pandemic, and that makes more people interested in alternative financial instruments and assets. I’m sure it will continue and it may take a few years to grow and progress.