Decentralized exchanges (DEXs) have experienced a significant downturn in trading volumes, according to data from leading cryptocurrency market data provider, Kaiko. The monthly spot trading volumes on DEXs plummeted by 76% to $21 billion in June this year, compared to $88 billion in January 2022. This decline was steeper than the 69% drop seen by centralized exchanges, which fell to $429 billion.
Despite the appeal of DEXs to crypto enthusiasts who prefer to avoid the intermediary model of traditional finance, these platforms have been grappling with challenges. They often suffer from complex user interfaces, slower transaction speeds, and lower liquidity than centralized venues such as Binance Holdings Ltd. or Coinbase Global Inc.
Per the report, institutional investors, in particular, have found it difficult to navigate these peer-to-peer exchanges. However, Richard Galvin, co-founder at Digital Asset Capital Management, noted that these platforms are still in their infancy, being generally less than three years old, and their designs continue to improve.
Efforts to enhance these platforms are underway. Uniswap, the largest decentralized trading venue, recently introduced a new protocol aimed at improving prices for clients by aggregating disparate digital-asset liquidity sources. Earlier this year, blockchain firm Vertex launched a decentralized exchange claiming to offer speeds comparable to centralized platforms.
However, regulatory challenges in the industry continue to persist as a PwC survey indicated that DEXs pose compliance difficulties as they are unregulated. Townsend Lansing, head of product at crypto asset manager CoinShares International Ltd., stated that regulatory issues are a significant hindrance to these protocols.
Despite these challenges, the number of monthly active users on DEXs has been on the rise since 2020, surpassing 1 million for most of this year, according to Token Terminal data. This trend may reflect growing concerns about the future of centralized platforms, particularly in the wake of the FTX exchange’s bankruptcy amid allegations of massive fraud.
The entry of traditional financial firms into the crypto market could bring more liquidity to the digital-asset ecosystem, according to Yves Longchamp, head of research at Seba Bank AG. He suggested that this could initially boost centralized-exchange volumes but could later also lead to an increase in volumes across DEXs due to a rise in demand for crypto in general.
However, it’s not just peer-to-peer trading that’s been hit. Kaiko’s previous report revealed a painful plunge in spot trading volume for all top-tier centralized cryptocurrency exchanges in Q2, 2023. Binance (BNB), the world’s largest exchange, suffered the most, with 70% of its aggregated spot trading volume across all pairs vanishing.