DeFi Exchange Says It Beats Bigger Competitors Binance, Coinbase
(Bloomberg) – Uniswap, the largest decentralized crypto exchange, says it can provide more liquidity than its larger, centralized rivals Coinbase and Binance because it incentivizes its liquidity providers to offer better prices to traders.
Most read by Bloomberg
Compared to the most popular ether trading pairs on the centralized exchanges, the latest version of Uniswap, launched about a year ago, allows traders to more easily execute large trades at a price range they prefer, new research from Uniswap Labs, the lead developer of the exchange, found. Coinbase and Binance did not respond to requests for comment.
The research used a metric called Depth of Market to compare liquidity between Uniswap v3 and the centralized exchanges. Market depth, a common way of measuring liquidity on exchanges, shows how much of one asset can be traded against another at a given price level. On an Ether/USD trade pair, a trader executing a single $5 million trade can save about $24,000 on Uniswap v3 compared to Coinbase, according to the study.
“The fact that this liquidity exceeds even large centralized players shows how quickly crypto and global markets are adapting to innovations in decentralization,” said Dan Robinson, head of research at crypto investment firm Paradigm and co-author of Uniswap’s latest study.
Uniswap v3 is the largest decentralized exchange by trading volume, with more than $1.7 billion worth of assets changing hands in the last 24 hours, according to data from Coingecko. However, Binance is the largest centralized crypto exchange with a trading volume of $22.2 billion over the same period. Coinbase, meanwhile, recorded $3.1 billion.
The story goes on
Uniswap has already used a mechanism called “Automated Market Maker” by which when someone wants to convert one crypto token into another, a smart contract or pieces of code running on a blockchain determine the price. Anyone can provide liquidity to any of the liquidity pools on Uniswap and earn fees from trades in those pools. This frees exchanges from relying on sophisticated high frequency traders for market making.
The latest version of Uniswap allows individual market makers to set a specific price range in which they wish to provide liquidity. As they can only earn fees on trades that occur within this range, they are encouraged to provide liquidity at a trader preferred rate.
Liquidity on exchanges in a topic beyond the digital asset area. The US Securities and Exchange Commission has previously recognized that the lack of liquidity in thinly traded assets poses a challenge for centralized limit-order exchanges.
But automated market makers are far from perfect. The kind of freedom they offer on decentralized exchanges makes it easier for developers to generate interest in a new token of their manufacture before ripping it off the market, also known as the infamous “pump-and-dump” scheme. In the latest version of Uniswap, its liquidity providers may also face an issue known as impermanent loss, which is the loss in dollars from market making on a volatile asset.
Meanwhile, traders on centralized exchanges can use an algorithmic trade execution strategy like TWAP, or time-weighted average price, to execute large trades without impacting the market too much, said John Kramer, who is responsible for derivatives and DeFi trading at crypto market maker GSR .
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
