Do Users Choose DEX or CEX When Participating in Transactions in the DeFi Market?

In this article, we take a deeper look at the landscape of centralized (CEX) and decentralized exchanges, the differences in terms of operations, transaction fees, and trading volumes.

Over a decade ago, Bitcoin began as a kind of technological experiment. Since then, the global financial markets have changed enormously. At the heart of the digital currency revolution, blockchain technology created the first smart contract platform, Ethereum.

Over the years, the Ethereum network has become a major driver in allowing users to interact in a truly decentralized manner. Decentralized exchanges (DEXs) are part of a growing suite of protocols on the Ethereum blockchain. But due to the first mover advantage, CEX or centralized exchanges have continued to outperform despite a growing number of DEXs.

The battle between the two sides will intensify in 2021 with the emergence of more advanced smart contract platforms. But undeniably, both CEX and decentralized exchanges are indispensable means of conducting transactions.

Coinbase and the history of CEX

Coinbase is one of the most reputable consumer-centric cryptocurrency exchanges in the world. The company made history after going public in April 2021 and becoming the first company in the industry to list on Nasdaq. Founded exactly 10 years ago, Coinbase is often considered the largest cryptocurrency exchange in the United States, with a market cap of nearly $42.55 billion.

Coinbase Monthly Trading Volume | Source: IntoTheBlock

Coinbase has seen real growth in 2021 thanks to a bull run along with other major milestones. IntoTheBlock noted that the exchange hit its peak monthly volume in May 2021, processing around $200 billion. Despite the post-November plunge coupled with a series of market corrections, Coinbase has seen remarkable growth over the past 1.5 years.

For a better understanding: The veteran US stock exchange processed a trading volume of around 11 billion US dollars in May 2020. By the end of January 2022, the exchange’s monthly trading volume was $120 billion, a 1,000% increase over just 1.5 years. This also proves that the more transactions processed, the higher the revenue for the centralized exchange and its shareholders, as the platform charges a fee for each transaction processed.

Uniswap: A good candidate for DEX

In 2016, Ethereum founder Vitalik Buterin first proposed the idea of ​​a decentralized exchange (DEX) that would join the maker of automated on-chain markets with several specific features. A year later, former Siemens engineer Hayden Adams turned the concept into a real product, which led to Uniswap. Today it is known as one of the first DEXs created on the Ethereum network.

Launched in 2018, Uniswap V1 has been able to gradually gain market share in terms of transaction volume processed. Subsequent versions, V2 and V3, focused on improving various aspects of the DEX. Currently, Uniswap’s hybrid protocols have grown into one of the leading decentralized exchanges (DEXs) in space. The protocol’s governance token, UNI, currently has a market cap of around $7 billion.

As a DEX leader, Uniswap’s trading volume likely reflects widespread protocol usage and broader evaluation of DeFi adoption.

Uniswap Monthly Trading Volume | Source: IntoTheBlock

Uniswap broke all previous records to reach ATH trading volume in December 2021. Statistics show that DEX processed around $82 USD between its V2 and V3 instances.

It is important to note that Uniswap and other DEXs have consistently challenged Coinbase. Analyzing trading volume, the IntoTheBlock indicator shows that Uniswap has gained a significant market share despite going live six years after Coinbase.

Explosion of DEX

 The appeal of decentralized exchanges includes factors such as privacy, security, and profit opportunities.

Centralized exchanges collect trading fees through their platforms, which serve as revenue to keep the business going. On the other hand, decentralized exchanges  have liquidity providers (LPs) to keep their doors open. Anyone can become an LP by depositing funds into one of the DEX pools. This allows the LP to automatically start earning swap fees, which are billed to users who trade through them. In other words, CEX charges fees for providing services, while DEX earnings (swap fees) are allocated to liquidity providers.

Coinbase and Uniswap Monthly Transaction Fees | Source: IntoTheBlock

Coinbase typically charges users 0.5% of the amount traded. Most pools on Uniswap charge a 0.3% fee. Certain pools on the DEX can have fees as high as 1% and as low as 0.01%. The graph above from IntoTheBlock gives a clear insight into the fees generated by both platforms.

In May 2021, Coinbase fees surged to a record high of almost $1 billion. Uniswap, on the other hand, recorded an ATH in December 2021 when it generated nearly $246 million in monthly fees. These fees were then distributed to liquidity providers, meaning Uniswap was able to allocate $246 million in swap fees for the month.

DEX is constantly innovating

To meet the growing demand, decentralized exchanges have continued to innovate and improve services for their users.

Recent DeFi developments include the implementation of a 0.01% fee pool for stablecoin trading on Uniswap’s platform, as well as the continued growth and launch of pools with a 0.05% fee, currently the largest pool in Uniswap by transaction volume.

The implementation of Uniswap on top of emerging aggregation solutions like Arbitrum and Optimism has also boosted its momentum by minimizing transaction gas fees. This, coupled with low fee pools, gives DEXs an opportunity to enter the competitive arena with the cheapest transaction fees in the space. As DeFi and DEX continue to evolve to offer the best possible service to the user base while maintaining their own unique characteristics, the industry will likely continue to see a migration of new users into the space.

Conclude

The trends discussed above and user mobility give a better picture of where they choose to trade in the DeFi market, with the ecosystem growing at an unprecedented rate.

DEXs offer more opportunities than centralized competitors and generate better returns on users’ assets. DeFi is still booming and DEX is where most of the development is happening.

However, the risks associated with DeFi and certain DEXs, such as high gas fees or temporary loss of liquidity providers, should not be discounted.

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