Satoshi Nakamoto’s introduction of the Bitcoin blockchain in 2009 was the start of all things decentralized finance. Bitcoin was the first of its kind — a completely decentralized cryptocurrency that did not answer to any authority. The adoption of Bitcoin created the need for cryptocurrency exchanges where people can buy, sell and trade crypto. However, crypto exchanges remained centralized, and this went against what Bitcoin stood for, which was full decentralization. But back then, they were the only way to exchange crypto.
In 2014, Nxt, a proof-of-stake blockchain, announced it was planning something different: a decentralized exchange. Nxt Asset Exchange launched soon after, becoming one of the first DEXs in the crypto community. In this early iteration of a DEX, trades were quite limited. Asset-to-asset trading wasn’t a possibility, although it was an important stage in the evolution of the technology.
The first truly decentralized exchange was Block DX. The protocol reflected Bitcoin’s original principles: transparency, high levels of decentralization, openness and permissionlessness. It focused on interoperability, allowed the decentralized exchange of assets and let DApps be built on the protocol. DEXs gradually evolved into those that are used today, such as Uniswap, dYdX and PancakeSwap.
Fast forward to 2021, and hundreds of DEXs had been created, with a Chainalysis report showing that the number of DEXs had tripled by Q3 of 2021. The increase is primarily attributed to the growth of DeFi, clocking in at over 300% in just a year. But decentralized exchanges have yet to surpass centralized exchanges in terms of visitors, with Binance leading at 171 million users per month.
The DEX ecosystem saw a peak in volume during mid-2021 at $170 billion per month, driven by Uniswap v3’s launch. Reports show that most of the growth could be attributed to Uniswap, with SushiSwap coming second by some margin. 2021 also saw total volumes surpass $1 trillion, with Uniswap commanding the most 24-hour volume at around $1.45 billion a day.
On the flip side, an Amazon Web Service outage halted operations for decentralized exchange dYdX in December 2021, alongside affecting centralized exchanges like Binance. This revealed that some decentralized platforms, like dYdX, still rely on centralized services. Notably, dYdX shortly thereafter acknowledged that it’s “deeply committed to fully decentralizing.”
2022 kicked off with new DEXs appearing, such as Sonic, which is the first DEX on Dfinity Foundation’s Internet Computer blockchain, and SundaeSwap, which is built on the Cardano blockchain. Many other DEXs designed for a variety of blockchain networks are also likely under development and will be launched this year.
Overall, DEXs have grown in popularity and volume over recent years, and new solutions continue to emerge. Ethereum is expected to complete its migration to proof-of-stake around mid-2022. The next step will be to test and roll out sharding, which is expected to address its current issues with scalability, as well as the issue of fees associated with DEXs. This should prompt further use of this type of exchange among regular users wishing to exchange smaller amounts of crypto, although the current roadmap has shard chains not shipping until 2023.
In the meantime, Ethereum competitors are seeing a surge of DEXs appearing, aiming to facilitate trends and asset exchange. Furthermore, new networks and innovative solutions are emerging as well, such as Avalanche’s three-blockchain solution that aims to address common issues that plague blockchains. Alongside the continuous evolution of blockchain technology, DEXs are expected to continue playing a crucial role in the crypto ecosystem well into 2022.
Exchanges
