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- “It is possible that the volume of decentralized derivatives will surpass decentralized spot exchanges at some point.”
- DEXs are increasingly moving towards layer two solutions.
- "The concept of digitizing financial markets and how they can be reinvented along user-centric lines is something that people are still learning."
- "Regulation will continue to be a priority for DEXs globally."
The debate continues about the true decentralization of cryptocurrencies. While crypto assets like Bitcoin (BTC) operate without an obvious hub, critics point out that the global market is too reliant on a handful of centralized exchanges: Binance, Coinbase, and Kraken (to name a few). liquidity and investment.
Well, cryptocurrencies have already provided a solution to this problem, in the form of decentralized exchanges (DEX). These are effectively protocols for creating pools of tradable assets, and although they remained relatively marginal in previous years, 2021 has seen them gain prominence.
According to industry figures speaking to Cryptonews.com, DEXes will continue to grow in 2022, fueled by the growth of competing blockchains and faster layer-two scaling solutions. And while their centralized counterparts may remain dominant, they will continue to gain more market share, with growing demand for self-care fueling their expansion.
From billions to trillions
“DEX trading volume has been on the rise since the DeFi summer of 2020,” said Timo Lehes, co-founder of Swarm Markets, a DeFi protocol.
He notes that trading volume on DEXs reached around €1.1 billion in 2021. Uniswap (v3), for example, currently has 24-hour volumes of around €2.6 billion, while Pancakeswap clocks in at almost €800 million, according to CoinGecko data.
And for Lehes, these volumes "will only increase as people reap the benefits of DeFi innovation and look for performance."
He is not alone in predicting continued growth, as JHL, a DEX Serum contributor based on the pseudonym Solana (SOL), expects DEXs to continue to capture market share on centralized exchanges.
“One of the main drivers is the launch of more DeFi derivative protocols on fast and cheap blockchains,” he told Cryptonews.com.
“We are seeing strong volume growth on decentralized derivatives in 2022, and we think it is possible that volume on decentralized derivatives could outpace decentralized spot exchanges at some point, just like we are seeing on centralized exchanges.”
JHL highlights the launch of several new DEXs and decentralized trading protocols on Solana, including PsyOptions and Zeta Markets.
“Zeta Markets is building an unsecured derivatives platform for options and futures. These protocols provide the building blocks for a robust ecosystem of futures and options to thrive,” he added.
SKALE Labs CEO Jack O'Holleran is also bullish on DEXs, predicting that "we will soon start to see DEXs take over market share from centralized exchanges." And for industry observers and participants, it's because they offer a number of advantages over centralized alternatives, including sovereignty, choice, and cost-effectiveness.
“The DeFi infrastructure gives investors and traders full control over their assets at all times through features such as self-custody. Asset digitization creates opportunities to secure anything, creating greater reach in global financial markets and allowing for greater fluidity and choice,” said Timo Lehes.
He adds that DEXs are increasingly turning to layer-two solutions like Polygon, which makes trading cheaper for regular investors, which will help increase trading volume in DeFi.
Ease of use, new products
As DEXs are expected to show increased interest this year, another trend will see them work to improve their usability so that they can effectively respond to the growing demand.
"DEXs are currently too complicated and expensive for everyday users. The rise of custodial wallets, fiat on-ramps, and gasless transactions will bring the power of decentralized finance to billions of people in the next 5 years," said Jack O'Holleran.
However, for Timo Lehes, DEXs and other DeFi platforms have already come a long way to become user-friendly, so 2022 will be more of a consolidation in the user experience area than a revolution. That said, increased education will be required to familiarize more casual users with the underlying principles and services.
“Most DeFi platforms are easy to navigate, but the concept of digitizing financial markets and how they can be reinvented along user-centric lines is still a learning curve. Social media and independent groups are doing a great job helping to bridge the knowledge gap so more people are comfortable with DeFi,” he told Cryptonews.com.
One of the ways that familiarity will increase is as DEXs and other decentralized platforms move more traditional products, like securities, on-chain.
"Go ahead, and DeFi will seamlessly integrate into 'Fi'. We know we will have achieved our goal of integrating traditional finance into the DeFi ecosystem, when people access financial products and services without even realizing they are on-chain blocks,” added Lehes.
Serum's JHL also expects DEXs to introduce more seamless fiat integration next year, including products like FTX Pay. “By activating credit or debit cards in these crypto wallets, more people can get into the overall DeFi ecosystem,” he said.
Topics: regulation and cybersecurity
There is no doubt that another thing DEXes will see more of this year is regulation. However, most participants are confident that regulators will take a balanced approach and that platforms will adapt well to any new regime.
“Regulation will continue to be a priority for DEXs around the world. While we cannot predict regulatory changes, we see that as more institutional investors enter the DeFi space, more DEXs will consider offering permissions (KYC'd or KYB'd) to attract more institutional capital,” JHL said.
While SKALE Labs' Jack O'Holleran suggests that we don't really know exactly what regulation encompassing DEXs will look like, Timo Lehes cites the case of Germany as an example of how regulators can take a balanced approach.
"Germany is a great example of how DeFi can be regulated," he said. “Forward-thinking regulator brought crypto assets in line with existing securities laws in the German Banking Law Amendment in 2020.”
Lehes also explains that, as an example of a DeFi protocol with automated market maker liquidity, in Germany, Swarm Markets applied BaFin regulations to a decentralized finance model, combining DeFi innovation with familiar laws.
“Regulation, if done correctly, can expand the DeFi sector both in terms of assets available and participants to trade with. The industry can only continue to grow and mature if we properly address issues related to KYC, and investor protection,” he added.
However, another issue that may continue to trend for DEXs is cybersecurity and attacks. For example, decentralized trading platform Poly Network suffered an infamous €600 million hack in August, while the DeFi sector has seen too many hacks to mention over the past year.
As DEXs grow in size and resources, users may find their stability and security gradually improve, though we may still see new vulnerabilities this year. However, that doesn't mean centralized exchanges are safe, as several hacks have shown (but you can at least hope to get your money back).