The biggest decentralized crypto exchange Uniswap claims that it beats its larger centralized rivals Coinbase and Binance in terms of providing more liquidity. Uniswap backed up its claim by stating that it gives its liquidity providers incentives to provide better pricing to traders.
According to fresh research conducted by the exchange’s main developer, Uniswap allows traders to perform large-size deals at a lower cost than the most popular Ether trading pairings on centralized exchanges.
The research used a metric called market depth to compare liquidity across Uniswap v3 and the centralized exchanges. Market depth shows how much of one asset can be traded for another at a given price level.
For an Ether/USD trading pair, a trader who executes a single $5 million trade can save around $24,000 on Uniswap v3 compared with Coinbase.
Co-author of Uniswap’s latest research Dan Robinson said that the fact that this liquidity exceeds even major centralized exchanges demonstrates how swiftly crypto and global markets are adapting innovations in decentralization.
Uniswap v3 is the largest decentralized exchange by trading volume with over $1.7 billion worth of assets changing hands in the past 24 hours, as per Coingecko. However, Binance is the largest centralized crypto exchange with $22.2 billion in trading volume noted in the same period. Meanwhile, Coinbase stands at $3.1 billion.
Uniswap has already been using a mechanism called automated market maker through which a smart contract runs on a blockchain. This determines the price when someone wants to convert one crypto token to another. Anyone can provide liquidity to any of the liquidity pools on Uniswap and earn incentives from trading in those pools.
Such a mechanism eliminates the need to rely on sophisticated high-frequency traders for market making.
The latest version of Uniswap enables individual market makers to set a specific price range they want to provide liquidity in. Since they can only earn fees for trades that occur within range, it encourages them to offer liquidity at a price favored by traders.
Despite the benefits, automated market makers have some drawbacks. The kind of freedom they offer on decentralized exchanges makes it easier to generate interest in new tokens before pulling it off the market, popularly known as the “pump-and-dump” strategy. Another threat it poses is impermanent loss, which is a loss in dollars from the market making for a volatile asset.
However, Uniswap is working aggressively to expand its reach and advance its offerings. Recently, Uniswap launched a new venture division targeting Web3 projects. The newly formed venture unit will invest in companies across various stages and areas within Web3.
