The increased popularity of DeFi projects has spurred a new upheaval of demand for cryptocurrencies and a steady rise in the price of the king of cryptos – Bitcoin, which has achieved its highest mark in almost three years.
The reasons for the new growth of market demand are many and include numerous security problems of centralized cryptocurrency exchanges. This has driven a rise in the capitalization of the decentralized exchange (DEX) market. In fact, DEX tokens have outperformed their centralized counterparts by 5 times this year, with an average increase of 240%, while centralized exchange (CEX) tokens have only increased by 44%, according to Messari.
The Driving Trends
There are a number of factors that are contributing to crypto market growth and include both security problems on centralized exchanges and the recent KuCoin hack, which has drastically undermined faith in centralized exchange platforms. Additionally, DEX features like secure peer-to-peer trading and the appearance of Initial Decentralized Exchange Offering as a new and popular crowdfunding model, have been highlighted as determining reasons for market revival and its continued growth in 2021.
Another factor is the growth of dApps, as despite Ethereum's significant dominance, market participants have seen the emergence of new blockchain protocols, including Polkadot and NEAR Protocol. They are already in stiff competition with Ethereum and are ready to compete for the status of the best platform for decentralized applications and smart contracts.
The boom of decentralized finance (DeFi) tokens is another major factor as liquidity mining and profitable farming have become so popular that the average daily trading volume of DeFi tokens has reached a record $1 billion. In September, the total volume of assets locked in DeFi protocols exceeded a record $15 billion, as throughout the second half of 2020, over 500 DeFi projects have emerged, all offering the possibility of generating passive income, thus becoming the main driver of the growing popularity of decentralized finance applications.
The scalability of cryptocurrencies is also contributing to the growth of DEX platforms as the development of Lightning Network and Raiden Network technologies for the Bitcoin and Ethereum networks has swelled the number of transactions. These technologies allow networks to scale and give ordinary cryptocurrency holders the opportunity of carrying out instant transactions with almost zero fees, which is where DEX platforms fit in. In addition, many exchange operators are trying to implement support for crypto-fiat channels, thus facilitating the process of buying cryptocurrencies using bank cards.
More importantly, the arrival of institutional investors, who are extremely cautious about investing in high-risk assets, and the popularization of national digital currencies has marked 2020 as a turning point for the crypto market. The People's Bank of China has already tested its CBDC digital currency in pilot transactions totaling more than $160 million. Moreover, the regulator has tested about 7,000 different scenarios for using its digital currency, including paying utility bills, transportation and government services. These advancements are pushing more users to start seeking secure and reliable, and, more importantly – fast exchanges for conducting their operations.
The volumes traded on decentralized exchanges recorded in September have seen their third consecutive doubling from the previous months after a 160% rise in August, according to Dune Analytics. Aggregate trading volume on decentralized exchanges reached $23.6 billion in September, up from $11.6 billion in August. The main driver of such growth is the rise of DeFi projects as DEX platforms are syphoning users from centralized platforms that are incapable of matching the offerings of Uniswap, IDEX, and their ilk.
Uniswap stormed the market earlier this year with its Ethereum-based UNI that has surged over 600% since, marking it as the most sought-after DEX asset on the DeFi market. The reasons for such success are many, but the main ones can be narrowed down to the fact that Uniswap charges no issuers fees for listing new tokens, and generates revenue through transaction fees. More importantly for users, the platform does not verify their identities, unlike most centralized exchanges, placing it in stark contrast to its competitors that bow and grovel before regulators and their new requirements on KYC and AML procedures.
Another runner up on the market - IDEX - offers user-custody of funds, off-chain trading, privacy protection, and robust security mechanism.
In Q3 of 2020, new and promising players have emerged on the market, suggesting that 2021 might become the year of a booming DEX market, similar to DeFi of this year. Some of them offer new technological approaches that are unique to the industry. For instance, the TomiEX exchange claims it will be featuring postmining technology for its native TEX Coin. The platform offers its users a host of modern functions that provide for high-quality algorithmic trading.
Decentralized exchanges continue to develop attractive economic model by issuing their native tokens, which ensure thee steady development and proper marketing of the platform. At the same time, the growing demand for decentralized finance and trading coupled with the outstanding success of such tokens like Uniswap suggests that looking at some of the DEX tokens in 2021 might be a good idea as part of the diversification of the portfolio.