— Crypto Fruit 🦄 (@crypto_fruit) December 12, 2019
Since its inception in November 2018, Uniswap has garnered a significant amount of traction within the DeFi community as it has established itself as the go-to decentralized exchange due to its intuitive UI/UX for swapping Ethereum-based tokens.
Despite the downtrend in crypto prices over the past few weeks, major decentralized exchanges have hit record-highs in trading volumes. Therefore, it’s no surprise that Uniswap fees are beginning to accumulate to significant levels as LPs are cashing-in on the surge in volume. In tandem with the surge in volume, lciquidity on major assets is also nearing ATHs.
For the most part, liquidity providers can experience substantial returns on the exchange, especially during times of low volatility with relatively high volume.
As it stands today, Synthetix’s SNX is the highest returning pool with a 37.6% annualized return in terms of the past 30 days of volume. MakerDAO’s MKR is the second most lucrative liquidity pool on Uniswap, boasting a solid 21.6% annualized return in the past 30 days followed by SAI and USDC with a 21.2% and 21.1% return, respectively.
With the 0.3% trading fees on Uniswap, becoming a liquidity provider for the decentralized exchange will become increasingly more attractive as volume continues to increase over time.
Despite the high returns, record-high volumes and liquidity, Uniswap still severely lags behind centralized counterparts. According to Messari’s Reported Volume, 24H volume sits around $7.37B – a drop in the bucket for Uniswap’s $1.2M in daily volume. As a result, Uniswap only represents 0.016% of total market volume. While this seems like a negative, it clearly leaves the DEX market plenty of room for growth in the coming years as there’s no shortage of exchange trading. But what would drive growth?
One of the biggest factors behind the recent surge in Uniswap and DEX volumes at large is the growing composability for DEXs. With Uniswap and Kyber, DeFi and other decentralized applications can embed liquidity directly into the front-end of their application. This notion of composability allows users to close a CDP by paying with Dai when the system requires MKR or purchasing a cover on Nexus Mutual with ETH when the system requires NXM. As such, composability drastically increases usability for users as they no longer have to worry about having specific tokens in order to use their favorite DeFi applications or other dApps. Therefore, as the proliferation of DeFi continues to occur, we’ll likely see more and more applications taking advantage of the composability within DEXs.
Ultimately, the ability to quickly and easily swap crypto assets in an intuitive, decentralized, and permissionless fashion without the need for KYC is a vital aspect for the broader crypto ecosystem.
Back in 2017, we saw the potential for DEXs with EtherDelta as it averaged millions in daily volume despite the terrible user experience. Unfortunately, the exchange was plagued with “shitcoins” as requirements for listing on the exchange were just a few clicks. Luckily with Uniswap, there still remains that frictionless ability to easily list on the exchange by simply adding the contract address, decimals, and ticker symbol. However, now, the exchange relies on liquidity providers to lock up collateral in order for trading to occur. This capital requirement signals the relevance of tokens within the DeFi ecosystem as well as emphasizes the importance of a passionate community to capture the upside of becoming a liquidity provider.
In summary, 2020 is going to be an exciting year for DEXs and DeFi at large given the current trend. If you haven’t already, we strongly recommend using Uniswap and other DEXs as they’ve vastly improved from the incumbents of 2017.
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Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.