Centralized and decentralized exchanges (DEXs) have always been in battle with each other in the crypto market. Uniswap, the world’s largest decentralized exchange, says it is better than its rivals Coinbase and Binance when it comes to offering crypto market liquidity.
This is because Uniswap provides better incentives to liquidity providers and better value to traders. Uniswap Labs claims that the latest version of Uniswap DEX, launched last year, allows traders to execute sizable trades in the price range of their choice.
The research leverages market depth metrics to compare liquidity across Uniswap and other centralized exchanges. Market depth refers to how much a given asset can be traded against another for a given price level. Research shows that if we consider an ETH/USD trading pair, then trading $5 million in a single trade can save around $24,000 on Uniswap V3 as compared to Coinbase.
However, Uniswap still has a long way to go to reach Binance. Uniswap V3 currently handles daily transaction volume of $1.7 billion. Binance, on the other hand, handles $22 billion and Coinbase north of $3 billion. Dan Robinson, co-author of Uniswap’s latest research, told Bloomberg:
“The fact that this liquidity exceeds even the major centralized players shows how rapidly crypto and global markets are adopting innovations in decentralization”.
Liquidity on Uniswap with Market Maker
Uniswap leverages a mechanism called automatic market maker through a smart contract that sets the price of converting one crypto into another. Users of Uniswap are free to provide liquidity to any liquidity pool and earn fees from trades. This way exchanges do not need to rely on high frequency trades to make a market.
However, automated market makers also come with their own limitations. As Bloomberg explains:
“The kind of freedom they provide on decentralized exchanges makes it easy for developers to extract interest for new tokens of their making before they are taken out of the market, in what has been known as the infamous “pump-and-dump” scheme. Also Known As on the latest version of Uniswap, its liquidity providers may also face a problem called floating loss, which is a loss in dollars from creating a market for a volatile asset.
The material presented may contain the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or the publication has no responsibility for your personal financial loss.