Decentralized exchanges continue to record below-average volumes, particularly over the past three months. This crisis is mainly due to a significant drop in waning investor interest and a bearish crypto market.
Decentralized exchangesnormally referred to as DEX, have been the exchanges of choice for traders who prioritize anonymity over security.
Over the years, some decentralized exchanges have even surpassed centralized exchanges in monthly volume. The past three months have been a bit different, however, as cumulative DEX volumes have fallen below $100 billion. In August, DEX’s cumulative volume only reached $67 billion.
While $67 billion seems significant, the figure represents a 60% drop from this year’s high of $169 billion in May.
During this last crypto market crashselling pressure engulfed the market as many whales and institutional investors made efforts to limit losses. This has led to an increase in trading volumes of several cryptocurrencies listed in different DEXs.
June and July, which each saw around $85 billion in volume, were annual lows for the sector. This rout continued into August when DEX volume fell another 21%.
DEX volumes drop to long-term lows
Cryptocurrency price patterns are correlated to trading volumes. Volumes normally rise during extremely bullish periods and dip during bearish periods.
When Bitcoin (BTC) and Ethereum (ETH) hit new highs in November 2021, positive market sentiment was reflected in DEX volume. During this month, DEX volume reached $206 billion. That makes the August 2022 figure of $67 billion a 67% decrease in less than a year.
Uniswap led the way in the fall in volume
Uniswap is the largest DEX by trading volume, and the platform took a big hit in August. With a combined volume of $43 billion between Uniswap V2 and V3, Uniswap volume was less than half of its metric last May, which was around $104 billion.
Despite controlling 65% of the market throughout August, Uniswap’s volume still fell 23% from the $87 billion recorded in November last year.
As the biggest DEX on Binance Chain, Pancake Swap recorded $56 billion in volume at its peak in November 2021. As Uniswap’s main competitor, many analysts expect PancakeSwap to make up for losses on Uniswap, but that hasn’t necessarily been the case.
PancakeSwap volume was $8 billion last month, a loss of 86% and 58% from November 2021 and May 2022, respectively.
With Binance alone registering more than $20 billion in daily trading volume, DEXs still have a long way to go before they are on par with centralized exchanges.
Will Ethereum DEXs improve cumulative volume after the merger?
Since Ethereum hosts more decentralized exchanges than any other blockchain, traders who wish to remain anonymous are wondering if The Merge will help improve volumes.
Brian Pasfield, chief technology officer (CTO) of Fringe Finance, a decentralized money market designed to unlock capital allocation in crypto assets, sees no above-average improvement after fusion.
He said to be[In]Crypto, “Top Ethereum-Based Decentralized Exchanges Including Uniswap and SushiSwap, saw relatively low transaction volumes in the three months to August, underscoring concerns about the future of these protocols post-merger. While the reduction in trading volumes can be attributed to the ongoing attack labeled as crypto winter, investors are also turning to competing protocols with cheaper and faster transaction offerings. Nevertheless, it should be noted that Uniswap also supports other channels such as Arbitration, Optimism and Polygon. So the decrease in volume on Ethereum is offset by the growth on Layer 2 solutions.”
He added: “With the merger expected to be completed this month, the challenges inherent in these DEXs may not necessarily be resolved: the Ethereum Foundation clarified that The Merge would not necessarily introduce a faster or cheaper transaction . Thus, the average user may not see the value or impact of transitioning to a proof of stake model of consensus on these exchanges.
Pasfield concluded, “Unless these innovations are introduced to make the new Ethereum protocol usable for small-scale transactions, the status quo on blue-chip DEXs may not change. However, the investment outlook for Ethereum-based tokens will improve, which could encourage patronage of these tokens on DEXs by investors concerned about the energy-efficient nature of the new Ethereum blockchain.
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