The centralized and decentralized exchanges (DEXs) in the crypto market have been always in a fight with each other. The world’s largest decentralized exchange Uniswap says that it is better than its rivals Coinbase and Binance when it comes to offering crypto market liquidity.
This happens as Uniswap offers better incentives to liquidity providers and delivers better pricing to traders. Uniswap Labs claims that the latest version of Uniswap DEX launched last year allows traders to execute large-sized trades in the price range of their choice.
The research leverage the metric of market depth for comparing liquidity across Uniswap and other centralized exchanges. Market depth shows how much of a given asset can be traded against the other for a given price level. Research shows that if we consider an ETH/USD trading pair, a trade executing $5 million in single trade can save nearly $24,000 on Uniswap V3 in comparison to Coinbase.
However, Uniswap still has a long way to catch up to Binance. The Uniswap V3 currently handles daily transaction volumes of $1.7 billion. Binance, on the other hand, handles $22 billion and Coinbase handles north of $3 billion. Dan Robinson, co-author of the Uniswap’s latest research told Bloomberg:
“The fact that this liquidity exceeds even major centralized players illustrates how swiftly crypto and global markets are adapting to innovations in decentralization”.
Liquidity on Uniswap With Market Makers
Uniswap leverages the mechanism dubbed automated market maker via a smart contract which determines the price of converting one crypto to another. Users on Uniswap are free to provide liquidity to any of the liquidity pools and earn fees from trades. This way exchanges don’t need to rely on high-frequency trades for market making.
However, automated market makers come with their one limitations as well. As Bloomberg explains:
“The kind of freedom they provide on decentralized exchanges makes it easier for developers to drum up interest for a new token of their making before yanking it off the market, also known as the infamous “pump-and-dump” scheme. On Uniswap’s latest version, its liquidity providers can also face a problem called impermanent loss, which is the loss in dollars from market making for a volatile asset”.
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