Peer-to-peer crypto exchanges lose ground in shrunken market
CRYPTO exchanges that connect buyers and sellers directly without Wall Street-style middlemen are under pressure to improve their services amid a decline in market share.
These so-called decentralised platforms facilitate trading via algorithmic, blockchain-based software known as smart contracts, with users retaining custody of tokens rather than handing them to an intermediary institution.
Crypto diehards predicted a golden period for peer-to-peer trading venues such as Uniswap and dYdX after last November’s collapse of the FTX exchange, which undermined trust in centralised platforms that take control of tokens.
But that has not panned out. Monthly spot trading volumes on decentralised exchanges slid 76 per cent to US$21 billion by June this year from January 2022. It is more than the 69 per cent drop for their centralised rivals to US$429 billion, Kaiko data showed. The market share of peer-to-peer digital-asset platforms has dropped to 5 per cent from a 2023 peak of 7 per cent achieved in March, the figures indicated.
Decentralised platforms appeal to crypto buffs who dislike the intermediary model of traditional finance. But they are often hamstrung by more complex user interfaces, slower speeds and lower liquidity than key centralised venues such as those offered by Binance Holdings or Coinbase Global.
Most institutional investors find it difficult or impossible to trade on peer-to-peer exchanges, though their “designs continue to improve and the platforms are still generally less than thee years old”, said Richard Galvin, co-founder at Digital Asset Capital Management.
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Examples of efforts at improvement include a recent new protocol from Uniswap, the largest decentralised trading venue, which seeks to improve prices for clients by aggregating disparate digital-asset liquidity sources. Earlier this year, blockchain firm Vertex rolled out a decentralised exchange that it said offers comparable speeds to centralised platforms.
A crypto hedge fund survey by PwC indicated that decentralised exchanges pose compliance difficulties as they are unregulated. “The regulatory overhang is definitely a hindrance to these protocols,” said Townsend Lansing, head of product at crypto asset manager CoinShares International.
“Investors who are more conservative and not sophisticated crypto veterans would likely avoid decentralised exchanges and prefer steady, regulated traditional financial products,” said Vince Turcotte, director of digital assets at market surveillance firm Eventus.
While decentralised exchanges have struggled for volumes, monthly active users have steadily increased since 2020 and topped one million for most of this year, Token Terminal data indicated. That may reflect unease about the future of centralised platforms following FTX’s bankruptcy amid allegations of massive fraud, which sparked greater scrutiny from officials.
More investors are asking how to counteract custody and counterparty risk, leading them towards decentralised routes, said Karan Ambwani, India lead for dYdX.
Still, growing the user base may get more challenging given recent signs that traditional financial firms see opportunities in crypto as the market recovers from a US$1.5 trillion rout in 2022.
For example, institutional-only crypto exchange EDX Markets went live last month. The platform is backed by firms including Citadel Securities, Fidelity Digital Assets and Charles Schwab.
The entry of big traditional players from traditional finance will likely bring more liquidity to the digital-asset ecosystem, said Yves Longchamp, head of research at Seba Bank.
That “may benefit centralised-exchange volumes initially but could later also lead to an increase in volumes across decentralised exchanges due to a rise in demand for crypto in general”, Longchamp said.
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