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Foresight or folly? Data show 70% of exchanges are unmoved by DeFi volume

A recent survey by cryptocurrency data aggregator, CryptoCompare, shows that centralized exchange operators do not see the emergence of decentralized trading venues like Uniswap as a threat despite growing volume and activity in the DeFi space. 

In its September exchange review, CryptoCompare asked 26 of the leading venues in the space how likely it was for DEX liquidity to overtake that of centralized exchanges in a 2-year time span. 70% of those interviewed said that decentralized exchanges will not overtake centralized exchange volume due to their lack of liquidity.

Only 7.7% of the representatives found that it was a likely event, while 19.2% remained neutral. As shown below, 34.6% of the participants believe it is unlikely and 38.5% say it is very unlikely.

DEX liquidity survey results

DEX liquidity survey results. Source: CryptoCompare

Is DeFi still a diamond in the rough?

It is easy to dismiss DeFi as yet another short lived crypto-trend perpetuated by money-hungry founders and fueled by gullible investors. For multiple reasons, the sector resembles that of the 2017 ICO craze. 

There’s unaudited contracts holding hundreds of millions of dollars, unrealistics returns for platforms that seem like nothing more than vaporware and a whole lot of FOMO. Since DeFi became a buzzword, there has also been a significant number of scam projects and developer drama which have generated major waves in crypto media.

So the question is, if most of the highly speculative token projects appreciate steeply overnight for no reason, then abruptly crash the next day only to crash as abruptly, why do investors keep pouring money into DeFi? 

The primary reason is that the rewards provided by liquidity protocols have earned yield farmers unbelievable sums of money. As high APYs attract more yield farmers, decentralized exchanges like Uniswap and Curve can count on growing liquidity and as long as this cycle remains DeFi trading volumes are expected to increase.

Time to take DeFi seriously?

However, rewards usually come from trading fees. This means that, the higher the volume, the more exchanges and liquidity providers earn. 

DEX daily active users

DEX daily active users. Source: Digital Assets Data

Although data from Cointelegraph and Digital Assets Data show that the number of active users on decentralized exchanges has been in a steady decline since September, the total value locked in DeFi platforms continues to rise. 

Total value locked in DeFi platforms

Total value locked in DeFi platforms. Source: Defi Pulse

Flipside Crypto, a onchain data resource, recently found that around $300 million is being sent everyday to DeFi applications in Ether and other ERC20 tokens. 

This is nearly double the inflow seen at centralized exchanges and 70% of the $300 million alone are sent to Uniswap. It’s also worth noting that in September Uniswap trading volumes eclipsed that of leading centralized exchanges like Coinbase on multiple occasions.

According to the CryptoCompare survey, centralized exchange representatives believe that the privacy provided by DEXs are the primary reason why traders use these exchanges. 

While this is partially true, some of these projects are also aiming to solve some of the most challenging problems that exist in the digital asset world.

For example, Curve provides users a way to exchange stablecoins with very little slippage due to its liquidity pools, while Pickle Finance aims to bring stability to the pegs of stablecoins by artificially increasing supply and demand through malleable incentive mechanisms. 

There are a handful of similar projects and their existence shows that DeFi is attractive not only for its advantages to the individual but also for the community.

The truth is, centralized exchanges feel threatened by DeFi 

Many industry leaders have decided to not take DeFi seriously by simply writing it off as another passing fad but Binance CEO Changpeng Zhao feels differently.  Recently CZ told CoinDesk that he expects DeFi to “cannibalize” his exchange and this explains the exchange has been making some serious ventures into DeFi as of late.  

Even though the survey participants are effectively ignoring decentralized exchange trading volumes now, one interesting take away is that 40% of exchanges surveyed admitted that they are building or planning to build a DEX in the future.

This is a clear signal that centralized exchanges actually do view DeFi as a serious threat to their current business models.

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