In this prolonged period of bearishness in the crypto market, it’s not just the investors who
are taking a hit; the exchanges are also taking a severe beating. Leading crypto exchange Coinbase,
too of late, has witnessed significant losses, giving its investors cold feet
about future investments. Please subscribe to the channel I’m sage for kalkinemedia.
The investors’ fear got further fuel when Coinbase on Tuesday included a new risk factor
based on the US Securities and Exchange Commission
requirements for firms who hold crypto assets for third parties.
This, along with other factors, has now made its investors consider
investing in decentralised exchanges (DEX). Unlike a centralised exchange,
the DEX allows the users to trade without the need for intermediaries.
This also results in a reduction of transaction fees and offers greater liquidity on its platform.
In fact, over the few months, DEXs such as UniSwap and Pancakeswap have outpaced centralised
exchanges such as Coinbase and Binance. According to research by a crypto-focused investment firm,
Paradigm, the decentralised exchanges
are starting to see increased trade volumes whilst the likes of Coinbase are taking a beating.
How they have grown
The report finds that Uniswap Protocol v3 has more than ~2x
deeper liquidity than both Binance and Coinbase in Ethereum to the dollar,
Ethereum to Bitcoin and other Ethereum pairs compared to other leading exchanges.
When you further narrow it down, then the ETH/BTC trading pairs on Uniswap have generated more than
~3x higher liquidity than Binance and ~4.5x more liquidity than Coinbase.
The report finds that one of the reasons for such a dominance over the centralized exchange
can be linked to DEXs ability to offer greater liquidity
than centralised exchanges. DEXs can do this using the automated market makers (AMM) model,
which allows the users to directly interact with each other without the need for an intermediary.
The Paradigm report in many ways, echoes what Chainalysis had found
in its report about how DEXs have grown massively since 2019.
Chainalysis report had suggested that DEXs had become popular largely on the back of DeFi,
and it expected the DEX users to carry out bigger transactions and eventually grow in future.
Coinbase’s bankruptcy rumours
Coinbase’s poor performance was also largely due to the reports
suggesting that the exchange is on the verge of bankruptcy. The rumours got
wind after the company’s disclosure which suggested that in the case of bankruptcy,
the exchange will be holding the custody on behalf of its customers. This has set the cat
amongst the pigeons, with several investors pulling their funds out of the exchange.
However, Coinbase CEO Brian Armstrong was quick to quell the rumours by saying
that highlighting the risk factor doesn’t mean that the company is going bankrupt.
In a detailed tweet, Armstrong clarified that Coinbase has no risk of bankruptcy. He added,
Coinbase did add the new risk factor due to the SEC requirement called SAB 121, which is a newly
required disclosure for public companies that hold crypto-assets for third parties.
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