Greater Market Share, New Products, Familiar Challenges

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  • “It’s possible that volume on decentralized derivatives can exceed decentralized spot exchanges at some point.”
  • DEXes are more and more transferring to layer-two options.
  • “The concept of digitizing financial markets and how they can be reimagined along user-centric lines, is something people are still learning about.”
  • “Regulation will continue to be top of mind for DEXes globally.”

Debate continues to rage over simply how decentralized crypto actually is. While cryptoassets equivalent to Bitcoin (BTC) function with no apparent heart, critics observe that the general market is much too reliant on a handful of centralized exchanges — Binance, Coinbase, and Kraken (to call a couple of) — for its liquidity and funding.

Well, crypto has in truth already supplied an answer to this downside, within the type of decentralized exchanges (DEXes). These are successfully protocols for creating swimming pools of property that may be traded, and whereas they’ve remained comparatively marginal in earlier years, 2021 noticed them gaining in significance.

According to trade figures chatting with, DEXes will proceed to develop in 2022, fueled by the expansion of competing blockchains and quicker layer-two scaling options. And even when their centralized counterparts might stay dominant, they’ll proceed to achieve extra market share, with rising demand for self-custody fueling their growth.

From billions to trillions

“Trading volume on DEXes has been on the rise since DeFi summer in 2020,” mentioned Timo Lehes, Co-founder of Swarm Markets, a DeFi protocol.

He notes that buying and selling quantity on DEXes reached roughly USD 1.1trn in 2021. Uniswap (v3), as an illustration, presently posts 24-hour volumes of round USD 2.6bn, whereas Pancakeswap registers almost USD 800m, per CoinGecko knowledge.

And for Lehes, such volumes are “only set to increase as people enjoy the benefits of DeFi innovation and search for yield.”

He’s not alone in predicting continued development, with JHL — a pseudonymous contributor to Solana (SOL)-based DEX Serum — anticipating DEXes to proceed capturing market share from centralized exchanges.

“One of the key drivers is the launch of more DeFi derivatives protocols on fast, cheap blockchains,” he instructed

“We see strong volume growth from decentralized derivatives in 2022, and believe it’s possible that volume on decentralized derivatives can exceed decentralized spot exchanges at some point, just like we see on centralized exchanges.”

JHL factors to the launch of a number of new DEXes and decentralized buying and selling protocols on Solana, together with PsyOptions and Zeta Markets.

“Zeta Markets is building an under-collateralized derivative platform for options and futures […] These protocols provide the essential building blocks for a robust futures and options ecosystem to flourish,” he added.

SKALE Labs CEO Jack O’Holleran can also be bullish about DEXes, predicting that “We’ll soon start seeing DEXes take over market share from centralized exchanges.” And for observers and trade members, it is because they provide a number of benefits over centralized options, together with sovereignty, selection and cost-effectiveness.

“DeFi infrastructure gives investors and traders full control over their assets at all times because of features like self-custody. Digitizing assets creates opportunities to collateralise anything, creating greater breadth in global financial markets and allowing for greater fluidity and optionality,” mentioned Timo Lehes. 

He provides that DEXes are more and more transferring to layer-two options equivalent to Polygon, making it cheaper to commerce for normal traders, one thing which is able to assist scale transaction quantity throughout DeFi.

User-friendliness, new merchandise

Given that DEXes are anticipated to witness elevated curiosity this year, one different development will see them engaged on enhancing their usability, in order that they will successfully answer rising demand.

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

However, for Timo Lehes, DEXes and different DeFi platforms have already gone a great distance in the direction of making themselves user-friendly, so 2022 might be extra about consolidation within the space of consumer expertise than revolution. That mentioned, it can require a rise in schooling with a view to familiarize extra casual customers with the underlining rules and providers.

“Most DeFi platform [user interfaces] are easy to navigate but the concept of digitizing financial markets and how they can be reimagined along user-centric lines, is something people are still learning about. Social media and independent groups are doing a great job to help close the knowledge gap so more people feel comfortable using DeFi,” he instructed

One approach wider familiarity will improve is by DEXes and different decentralized platforms transferring extra conventional merchandise, equivalent to securities, on-chain. 

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

Serum’s JHL additionally expects DEXes to introduce smoother fiat onboarding within the coming year, together with merchandise equivalent to FTX Pay. “By enabling credit cards or debit cards on these crypto wallets more individuals can onboard to the general DeFi ecosystem,” he mentioned.

Challenges: regulation and cybersecurity

There’s additionally little doubt that one different factor DEXes will see extra of this year is regulation. However, most members are sanguine that regulators will take a balanced strategy and that platforms will acclimate themselves effectively to any new regimes.

“Regulation will continue to be top of mind for DEXes globally. While we cannot predict regulatory changes, we see as more institutional investors come into the DeFi space, more DEXes will look into offering permissioned (KYC’d [know-your-customer] or KYB’d [know-your-business]) products to attract more institutional capital,” mentioned JHL.

While SKALE Labs’ Jack O’Holleran means that we don’t actually know what precisely DEX-encompassing regulation will seem like, Timo Lehes cites the case of Germany for example of how regulators can take a balanced strategy.

“Germany is an excellent example of how you can regulate DeFi,” he mentioned. “The forward-leaning regulator has brought cryptoassets in line with existing securities laws in the amendment to the German Banking Act in 2020.”

Lehes additionally explains that, for example of a DeFi protocol with automated market maker liquidity, in Germany, Swarm Markets has utilized BaFin’s rules to a decentralized monetary mannequin, combining the innovation of DeFi with acquainted legal guidelines.

“Regulation, if done properly, 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 around KYC, [anti-money laundering], and investor protections,” he added. 

One different situation that will stay a development for DEXes, nevertheless, is that of cybersecurity and hacks. For instance, decentralized buying and selling platform Poly Network suffered an notorious USD 600m hack in August, whereas the DeFi sector has seen too many hacks to say over the previous year.

As DEXes develop in dimension and resources, customers may discover that their stability and safety regularly improves, though we should witness new exploits this year. However, this doesn’t imply that centralized exchanges are protected, as a number of hacks confirmed  (however at the least you possibly can anticipate to be reimbursed). 
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Find extra predictions for 2022 right here.

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