According to a new Chainalysis report, decentralized exchanges are booming, and their growth is currently outpacing that of their centralized counterparts.
The value of large decentralized exchanges (DEXs) such as Curve, Uniswap, and PancakeSwap increased by approximately 550 percent between August 2020 and 2021. The number of DEXs has increased faster than any other category. This places them far ahead of over-the-counter brokers, centralized exchanges, and what Chainalysis refers to as “high-risk exchanges,” or those with minimal know your customer (KYC) requirements.
According to Chainalysis, the number of large decentralized exchanges has been increasing even as the total number of active cryptocurrency exchanges has been steadily declining. After steadily increasing since January 2019, the number of all active crypto exchanges began to flatten out in July of last year. In the year that followed, the number fell from 845 to 672. That came as no surprise to the Chainalysis research team, according to Kim Gauer, the company’s head of research. It did, however, leave some questions unanswered.
They knew going into the data analysis that there had been consolidation among crypto exchanges, but not how unevenly it had impacted different types of exchanges, she said.
According to Gauer, the majority of the decline appears to be the result of smaller exchanges closing down. The data Chainalysis analyzed does not indicate whether those shutdowns were caused by mergers and acquisitions. She suspects, however, that many of them will close due to a lack of liquidity.
A few years ago, the number of active exchanges followed the market, but that stopped when a few large players in each category became dominant and grew much faster than their smaller counterparts.
According to Chainalysis’ report, the rise of DEXs “coincides with the explosive growth of the DeFi category in general.” DeFi is an umbrella term for a class of financial products that enable users to trade, borrow, and lend crypto assets without the use of third-party intermediaries. According to DeFi Llama, there is now more than $274 billion flowing in DeFi applications, with the majority of it locked up in Ethereum-based DEXs like Curve and Uniswap.
Growth in derivatives exchanges, which are still in the minority in comparison to other categories, has also been notable.
In August, there were 265,000 transactions on derivatives exchanges. This was dwarfed by the 5 million DEX transactions in the same month. However, the average transaction size in derivatives was $79,000, compared to $26,500 in DEXs.
Because the average transaction size on derivatives exchanges was higher, their value grew even faster than DEXs in the last year. According to the report, large derivatives exchanges such as Derebit, Bitmex, and FTX increased by 686 percent.
“We’re seeing large investments going to these platforms, despite the fact that there aren’t many that we have listed as derivatives [exchanges] in our data right now,” she said. “However, they’re large and highly liquid.”