New products

Greater market share, new products, familiar challenges

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  • “It is possible that the volume of decentralized derivatives will overtake 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 redesigned along user-centric lines is something people are still learning.”
  • “Regulation will continue to be a priority for DEXs around the world.”

Debate continues to rage over the true decentralization of crypto. While crypto-assets such as Bitcoin (BTC) operate without an obvious centre, critics note that the global market is far too dependent on a handful of centralized exchanges – Binance, Coinbase, and kraken (to name a few) – for its liquidity and investment.

Well, crypto has actually already provided a solution to this problem, in the form of decentralized exchanges (DEXs). These are effectively protocols for creating pools of assets that can be traded, and while they have remained relatively marginal in previous years, 2021 has seen them gain prominence.

According to industry figures speaking to Cryptonews.com, DEXs 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 DEX. Swarm Marketsa DeFi protocol.

He notes that trading volume on DEXs reached around $1.1 billion in 2021. Uniswap (v3), for example, currently boasts 24-hour volumes of around $2.6 billion, while Exchange of pancakes registers nearly $800 million, according to data from CoinGecko.

And for Lehes, these volumes “will only increase as people reap the benefits of DeFi innovation and seek yield.”

He’s not alone in predicting continued growth, with JHL – a pseudonymous DEX contributor based on Solana (SOL) Serum — expect DEXs to continue to gain market share on centralized exchanges.

“One of the main drivers is the launch of more DeFi derivative protocols on fast and cheap blockchains,” he said. Cryptonews.com.

“We are seeing strong volume growth in decentralized derivatives in 2022, and believe it is possible that volume on decentralized derivatives could overtake decentralized spot exchanges at some point, much 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 under-collateralized derivatives platform for options and futures […] These protocols provide the essential building blocks for a robust ecosystem of the future and options to flourish,” he added.

SKALE Laboratories CEO Jack O’Holleran is also optimistic about DEXs, predicting that “we will soon start to see DEXs taking 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 like self-custody. The digitization of assets creates opportunities to secure anything, creating greater reach in global financial markets and enabling greater fluidity and option,” said Timo Lehes.

He adds that DEXs are increasingly moving towards layer two solutions such as Polygonwhich makes trading cheaper for regular investors, which will help increase trading volume on DeFi.

User-friendliness, new products

With DEXs expected to see increased interest this year, another trend will see them working on improving their user-friendliness, so that they can respond effectively to growing demand.

“DEXes are currently too complicated and expensive for everyday users. The rise of custodial wallets, fiat ramps and gasless transactions will bring the power of decentralized finance to billions of people over the next 5 years” , said Jack O’Holleran.

However, for Timo Lehes, DEXs and other DeFi platforms have already come a long way to make themselves user-friendly, so 2022 will be more of a consolidation in the area of ​​user experience than a revolution. That said, it will require an increase in education to familiarize more casual users with the underlying principles and services.

“Most DeFi platforms [user interfaces] 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 of helping bridge the knowledge gap so more people feel comfortable with DeFi,” he said. Cryptonews.com.

One of the ways greater familiarity will increase is as DEXs and other decentralized platforms move more traditional products, such as securities, on-chain.

“Forward, [traditional finance] and DeFi will seamlessly integrate into ‘Fi’. We know that we will have achieved our goal of integrating traditional finance into the DeFi ecosystem, when people will access financial products and services without even realizing they are on the blockchain,” added Lehes.

Serum’s JHL also expects DEXs to introduce smoother fiat integration in the coming year, including products like FTX Pay. “By activating credit cards or debit cards on these crypto wallets, more individuals can enter the general DeFi ecosystem,” he said.

Issues: regulation and cybersecurity

There is no doubt that another thing that DEXs will see more of this year is regulation. However, most participants are confident that regulators will take a balanced approach and platforms will acclimate well to any new regime.

“Regulation will continue to be a priority for DEXs around the world. While we can’t predict regulatory changes, we see that as more institutional investors enter the DeFi space, more DEXs will consider offering permissions (KYC’d [know-your-customer] or KYB’d [know-your-business]) products to attract more institutional capital,” JHL said.

While SKALE Labs’ Jack O’Holleran suggests we don’t really know what exactly regulation encompassing DEX 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 you can regulate DeFi,” he said. “The 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 has applied BaFinto a decentralized financial model, combining the innovation of DeFi with familiar laws.

“Regulation, if done correctly, can expand the DeFi sector both in terms of available assets and participants to trade with. The industry can only continue to grow and mature if we properly address KYC related issues, [anti-money laundering]and investor protection,” he added.

However, another issue that may remain a trend for DEXs is cybersecurity and hacks. For example, a decentralized trading platform poly network suffered an infamous $600 million hack in August, while the DeFi sector has seen too many hacks to mention in the past year.

As DEXs increase in size and resources, users may find that their stability and security gradually improve, although we may still see new exploits this year. However, that doesn’t mean centralized exchanges are safe, as several hacks have shown (but at least you can expect to get your money back).
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