Centralized Exchanges Are Being Cannibalized by DEXs

By listing governance tokens associated with decentralized exchange (DEX) liquidity protocols, centralized crypto exchanges (CEX) are giving a shop window to the very tools designed to render their own services redundant.

Meanwhile, cryptocurrency trading volume continues to flow in the direction of DEXs, with over $235 million passing through decentralized exchanges in the past 24 hours. That’s more than the volume of Bitstamp, and just a third less than Kraken.

As the defi boom gathers pace, CEXs now face the prospect of eating their own tails in a bid to stay relevant.

Data c/o Dune Analytics.

CEXs Chase Defi Craze

The ongoing growth of the defi market hasn’t gone unnoticed by the major cryptocurrency exchanges. On July 31, Coinbase announced it would “explore support” for 19 new digital assets, including many associated with decentralized liquidity protocols such as Balancer, Curve and WBTC.

The move by Coinbase comes shortly after Binance opened its arms to Maker (MKR) and Dai (DAI), while Poloniex announced the listing of Uniswap meme token Tendies (TEND) on August 1. 

All of this amounts to a clear attempt by centralized exchanges to cater to an obviously burgeoning market. The problem for CEXs is that this market is the spearhead of a technology that was expressly designed to negate the need for centralized platforms entirely.

Well, perhaps not entirely…

Fiat Onramps

There could still be an important role for centralized platforms in a DEX-dominated future. As noted by EthHub and Gnosis founder Eric Conner, centralized exchanges are now becoming mere fiat onramps.

This view was seconded by Ethereum creator Vitalik Buterin who said this was the correct role of centralized exchanges, and that his only surprise was that it took so long to happen. Buterin tweeted:

“You can find interviews from me from 2017-18 where I say that is the correct role of centralized exchanges, and crypto-crypto may as well be decentralized…. I’m just surprised it took this long and then happened so fast.”

In July 2018, Buterin told attendees at a Techcrunch blockchain conference that he personally wished centralized exchanges would “burn in hell as much as possible.” 

Is There Fire?

While still vague and fanciful to some, the defi market now has a combined value of over $4 billion. If defi were a cryptocurrency token, it would be the sixth largest in the world. 

More than half of that sum is accounted for by lending protocols, especially Maker, which has $1.2 billion in value locked in. However, the second most active area of the defi market is DEXs.

Leading the list of DEXs is Uniswap, which recorded $115 million worth of trading volume on August 1. And according to blockchain researcher Qiao Wang, that number reached $126 million on July 31 – a number which creeps up on some major CEXs.

The rise of DEX trading volume coincides with a steady decline in global trade volume, which is down 64% since peaking at $267 billion as recently as March. The loss of nearly two-thirds of customer activity in four months ought to be cause for concern for major exchanges. The additional pressure on CEXs to list defi tokens that are actively being used against their own business interests complicates matters further.

The defi boom has sparked the flame that may eventually lead to Vitalik Buterin’s wish being granted. There’s definitely fire, but will it rise?

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