“Self-custody. That’s it. That’s the tweet.” — Uniswap Labs
Decentralized exchanges, or DEXs, are cryptocurrency exchanges that run on a decentralized network, meaning they are not governed by a single centralized entity. Instead, through the use of smart contracts on a blockchain platform, consumers directly own their assets. Decentralized exchanges were first proposed with the introduction of the Ethereum network, and because of their improved security and privacy characteristics, they have subsequently gained popularity as an alternative to centralized exchanges.
Several types of DEXs exist, such as automated market makers, which gained popularity in 2020 and 2021 and rely on liquidity pools for their operations. Liquidity pools are pools of assets that are used to facilitate trades on DEXs. A liquidity pool is created when users deposit assets like cryptocurrencies into a smart contract on a blockchain. These assets are then used to provide liquidity for trades on the DEX.
Although the DEX concept initially came on the scene in 2014, the crypto trading medium did not truly catch fire until 2020, when the DeFi niche of the cryptocurrency and blockchain space took off.
DEXs surfed several headlines across the crypto bear market in 2022. In May, Uniswap reached $1 trillion in total trading volume since its inception in 2018. In July, the Avalanche-based Pangolin DEX moved toward interoperability by unveiling its intent to launch on the Flare blockchain.
Another addition to interoperability came late in the year via a product from DEX aggregator OpenOcean for trading assets among multiple blockchains. On a less positive note, SushiSwap announced it was struggling financially at the end of the year, saying it had less than a year and a half of treasury runway left to fuel its efforts.
One major event that impacted DEX usage in 2022 was the collapse of centralized crypto exchange FTX in the latter half of the year, with DEX activity increasing following the collapse. However, the crypto industry also saw numerous DeFi-related exploits and thefts in 2022.
More people will probably start utilizing DEXs for trading and investing as their knowledge and comprehension of them grows. The number of users, assets and liquidity on DEXs may increase as a result. Furthermore, blockchain projects may work toward improving the scalability of DEXs, enabling quicker, more effective exchanges. For instance, on the development front, SushiSwap unveiled in early 2023 several planned initiatives for optimistic growth during the year, including a DEX aggregator expected in the first portion of the year.
It also remains to be seen what future regulatory action will look like in 2023, as various countries have unique ways of regulating DEXs. However, a more consistent regulatory framework will likely appear going forward, giving users and developers greater assurance.
