Peer-to-peer crypto exchanges lose ground in shrinking market

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(Bloomberg) — Crypto exchanges that directly connect buyers and sellers without Wall Street-style intermediaries are under pressure to improve their services amid falling market share.

These so-called decentralized platforms facilitate trading via blockchain-based algorithmic software known as smart contracts, with users retaining custody of the tokens rather than handing them over to an intermediary institution.

Crypto die-hards predicted a golden period for peer-to-peer trading platforms such as Uniswap and dYdX after last November’s collapse of the FTX exchange, which undermined trust in centralized platforms taking over tokens.

But it didn’t work: monthly spot trading volumes on decentralized exchanges fell 76% to $21 billion in June this year from January 2022, more than the 69% drop for their centralized rivals to $429 billion, according to Kaiko data. The market share of peer-to-peer digital asset platforms has fallen to 5% from the 7% peak reached in 2023 in March, the figures show.

Decentralized platforms appeal to crypto enthusiasts who don’t like the middle-of-the-road model of traditional finance. But they are often crippled by more complex user interfaces, slower speeds, and lower liquidity than major centralized sites like those offered by Binance Holdings Ltd. or Coinbase Global Inc.

Most institutional investors find it difficult, if not impossible, to trade on peer-to-peer exchanges, although their designs continue to improve and the platforms are still generally less than three years old, said Richard Galvin, co-founder of Digital Asset Capital Management.

New services

Examples of improvement efforts include a recent new protocol from Uniswap, the largest decentralized trading platform, which seeks to improve pricing for clients by aggregating sources of liquidity from disparate digital assets. Earlier this year, blockchain company Vertex rolled out a decentralized exchange that it claims offers comparable speeds to centralized platforms.

A survey of crypto hedge funds conducted by PwC indicated that decentralized exchanges pose compliance issues because they are unregulated. Regulatory overhead is definitely a barrier to these protocols, said Townsend Lansing, chief product officer at Crypto Asset Manager CoinShares International Ltd.

Investors who are more conservative and unsophisticated crypto veterans would likely avoid decentralized exchanges and prefer stable, regulated traditional financial products, said Vince Turcotte, director of digital assets at market monitoring firm Eventus.

While decentralized exchanges have struggled to gain volumes, monthly active users have steadily increased since 2020 and topped 1 million for most of this year, according to data from Token Terminal. This may reflect unease about the future of centralized platforms following FTX’s bankruptcy amid allegations of massive fraud, which has drawn closer scrutiny from officials.

According to Karan Ambwani, Indian head of dYdX, more and more investors are asking how to counteract custody and counterparty risk, leading them to decentralized routes.

Still, growing the user base may become more difficult given recent signs that traditional financial firms are seeing opportunities in crypto as the market recovers from a $1.5 trillion rout in 2022.

For example, EDX Markets, an institution-only crypto exchange, went live last month. The platform is backed by companies such as Citadel Securities, Fidelity Digital Assets, and Charles Schwab Corp.

The entry of large traditional players in traditional finance will likely bring more liquidity to the digital asset ecosystem, according to Yves Longchamp, head of research at Seba Bank AG.

This could initially benefit volumes on centralized exchanges, but could also later lead to increased volumes on decentralized exchanges due to an increase in demand for crypto in general, Longchamp said.

–With help from Suvashree Ghosh.

(Updates with Market Watch Officer comment in ninth paragraph.)

2023 Bloomberg LP

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