Decentralized Exchanges: Growing Competition Through Unbridled Growth

Godfrey  |  Mar 10, 2021

The cryptocurrency ecosystem may be outrunning the pace at which people embrace, integrate, and get acquainted with the tons of platforms out there. The crypto space now features exchanges where the buying and selling of digital assets take place, just as the traditional stock market has government-approved bourses for trading activities.

To get an insight into the crux of this article which focuses on decentralized exchanges, it is pertinent to understand the basic underlying differences between the exchanges that operate in the crypto space.

Centralized exchanges are those in which the bulk of the funds are under custody with the platform operators and every transaction passes through the exchange. These tend to work more like the traditional institutions, with the exception that the underlying product or service is digital currency-related.

Decentralized exchanges are the exact opposite of centralized exchanges, with transactions solely under the control of the traders, with the platform itself serving as an escrow. There are advantages and disadvantages to both types of exchanges and clamors for the true Satoshi vision, involving a decentralized payment ecosystem is recreating the business around centralized exchanges who are now beginning to integrate decentralized exchange features.

The Undeniable Traction

Decentralized exchanges (DEXs) are gaining such traction that underscores the long-term yearning for such platforms with the freedom to conduct transactions. Per the trust in the evolutionary tendencies inherent in the space, decentralized exchanges have iterated to Automated Market Makers (AMM) like Uniswap, a platform that seeks to foster the trading between two assets based on price quotes derived from either a simple or an advanced mathematical set-up.

The evolution of decentralized exchanges and the array of flexibility they offer has sparked a renewed interest in trading activities as observed by the massive community that rallies around these projects. DEXs are now so popular that there appears to be an unbridled launch of new projects by the day.

The Thin Line Between Quality and Quantity

Although it brings undue competition in the space, the proliferation of decentralized exchanges is not bad in itself, provided they all can capture the market, and offer value to the hoard of users out there, the majority of which has little or no knowledge about the fundamental basis of blockchain technology, or the dynamics of the market. 

The undue competition adduced earlier weakens the leverage any DEX has as most users in today’s crypto space are drawn to new platforms, particularly those who make their debut with their native tokens. Tokens that may be marketed with the promise of increased returns by early adopters.

There are tons of decentralized exchanges today, most built atop the Ethereum blockchain, with most now embracing the Binance Smart Chain, profiting from the skyrocketing network fees of the latter blockchain. While one of the concerns observable has been spelled out, including the indiscriminate launch of these projects, the other concern is that they serve as the breeding ground for exit scams.

Conducting liquidity provision transactions on decentralized exchanges like PancakeSwap for instance always bears the warning that anyone can create a token, which may cart away with the liquidity provided without recourse for any particular user’s loss. 

While the DEXs are sensational at this earliest times, the exposure of the frail projects or those with ulterior motives may eventually cause the loss of interest in the revolutions they all promise, and a retrace to the centralized exchanges may come off as the right option then.

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