The data raises more questions about the regulations of decentralized exchanges.
DEXs Surpasses CEXs in Trading Volume 2021-2022, But are Difficult to Regulate
Decentralized crypto exchanges (DEXs) come with notable pros (like limitless trading pairs) and cons (such as the difficulty of onboarding experiences), when compared to centralized exchanges. Nonetheless, their popularity is on an uptrend.
For about one year, from April 2021 to April 2022, Web3 users sent USD224 billion in on-chain to DEXs, which strips the centralized exchanges that handled a combined value of USD175 billion over the same period, according to a report released by Chainanalysis.
While these numbers do not speak to the bottom-line trading volume, they help to highlight the fact that DEXs provide a reliable alternative to CEXs. However, this fast rising shift to CEXs is raising concerns about how the sector will get regulated. Decentralized exchanges are self-regulating and run with no human element that steers everything in centralized counterparts.
According to economist Ethan McMahon of Chainanalysis, the shift from CEX to DEX in 2020s DeFi Summer was also notable in the non-fungible token (NFT) boom of 2021. In September 2020, DEX cleared about 50% of the market share. The number shot up to 80% in June 2021.
The shift to decentralized exchanges makes it pretty challenging to regulate them. However, McMahon indicated that the future dominance of DEX would be shaped by the regulatory framework.
Because DEXs are noncustodial and provide a wide range of currency pairs, McMahon emphasized that they are never easy to use and do not follow the same regulatory assurance as centralized exchanges (CEX). If the popularity of DEXs moves up even further, there is likely to be a regulatory crackdown.
“If [regulation] serves as a hindrance, it may actually reduce the market share,” McMahon expressed.