On-Chain Volume on DEXs Surpasses its Centralized Counterparts: Chainalysis

Chainalysis’ latest report finds that decentralized exchanges (DEXs) have surpassed centralized exchanges (CEXs) in terms of on-chain transaction volume since January 2021. However, to maintain their lead in market share, DEXs may need to resolve a set of issues, including regulatory scrutiny, in the future.

DEXs Vs. CEXs

Since CEXs usually adopt the “order books” system that enables off-chain transactions, on-chain transactions only account for a relatively small percentage of their total volume. In contrast, DEXs rely on smart contracts to execute trades automatically recorded on blockchains.

Chainalysis’ report indicates that $175 billion worth of cryptocurrencies were sent on-chain to CEXs from April 2021 to April 2022 – much less than the $224 billion sent to DEX during the same period. In addition, with the rise of DeFi that boosted the utilities of DEXs, their dominance of on-chain transactions reached its peak last June, accounting for over 75% of the total volume.

As DeFi activities waned along with the broader market remaining relatively bearish, the two types of exchanges almost split the current market share, with “55% happening on DEXs and 45% on CEXs.” Also, the overall on-chain activities are highly contingent on the state of the market.

“CEX transaction volume reached an all time high in late 2017 as Bitcoin climbed to its all-time high. Similarly, DEX and CEX transaction volumes alike skyrocketed in 2021 as cryptocurrency prices again multiplied.”

The report also shows that the on-chain transactions are more concentrated on the top five DEXs than on the top five CEXs from April 2021 to April 2022. Uniswap, SushiSwap, Curve, dYdX, and the 0x Protocol account for 85% of the volume happening on DEXs, and Binance.com, OKX.com, Coinbase.com, Gemini.com, and FTX.com supported only 50% of all on-chain CEX transaction volume.

The report attributes the intrinsic mechanism of DEXs to supporting such a trend of concentration:

“DEXs with higher liquidity may be able to provide more stabilized pricing for even the biggest market participants, but smaller pools may struggle to do the same without causing considerable price slippage – an unappealing proposition for both consumers and liquidity providers.”

Future Ahead of DEXs 

There are mainly three factors that determine if DEXs can maintain the lead, according to the report.

Lower transaction fees and fairer token pricings could be great incentives for users to choose DEXs over CEXs. Additionally, emerging as a self-custody and programmatic way of trading cryptocurrencies, DEXs need to find a way to convince mainstream investors “in favor of further automation, disintermediation, and self-custody.”

Last but not least, regulatory scrutiny could be a foreseeable challenge ahead for decentralized trading platforms. Chainalysis Economist Ethan McMahon reportedly stated that as the sector continues to increase in popularity, it may attract attention from watchdogs, thus leading to a drop in its market share.