Uniswap, a leading decentralized exchange (DEX), has seen tremendous growth in the last week, having cleared all-time highs in terms of platform liquidity and ETH locked in reserves.
DeFi Needs Liquid DEXes to Thrive
Achieving widespread adoption of DeFi requires users to be able to access the entire financial stack in a permissionless and decentralized manner. Thanks to this, DEXes are being hailed as an integral part of this stack going forward.
Centralized exchanges will still exist and thrive, but for the DeFi narrative to pick up steam, there needs to be more traction on their decentralized counterparts – and this is slowly happening.
Uniswap is a leading DEX in terms of liquidity, reserves, and overall usage. Network effects are especially important for protocols that rely on liquidity to grow. Exchanges, for instance, are chosen by investors and traders based on their ability to seamlessly facilitate trades. Order book depth and the exchange’s trading engine determine the exchange’s efficacy.
Hence, more liquidity accruing to an exchange leads to more users; this, in turn, leads to more liquidity on the exchange, creating a circular effect.
On Jan. 13, 2020, ETH reserves in Uniswap sat at 45,320, before increasing by over 68% to 76,260 ETH in just six days.
The price of ETH surged by approximately 16% over the same time period. Caleb Sheridan, co-founder of Blocklytics, noted in the latest issue of the Our Network newsletter that on Jan 17., Uniswap added a record $10 million of liquidity in a single day.
As the price of ETH went up, demand for ETH derivatives and DeFi-enabling tokens also joined in the rally. Uniswap liquidity is highest for sETH, or synthetic ETH, at $13.88 million. This sum makes up 30% of Uniswap’s total $46 million of liquidity.
Other frequently traded tokens on Uniswap include Augur (REP), Maker (MKR), and Synthetix Network (SNX), as well as various stablecoins.
USDC, DAI, and SAI together represent 13.4% of Uniswap pool liquidity, making it one of the best for traders in terms of minimizing slippage. At the time of writing, converting a single DAI into USDC is done with 96 basis points of slippage on Kyber and only 72 basis points on Uniswap.
Large traders usually prefer the use of DEX aggregators like 1inch or DEX.ag to reduce slippage on their orders. As Uniswap’s liquid reserves deepen, slippages have reduced significantly since launch.
To add to the narrative, Uniswap has been adding nearly 10 to 20 new token pairs per day. So, existing liquidity reserves are growing and new ones are being added at a rate of nearly 100 per week.
If Uniswap and other DEXes continue growing at current levels, it will be interesting to see how they compete with centralized exchanges and add to the robustness of DeFi.