Is CEX a Bridge between the Secondary Market and DeFi？
According to Dune Analytics, total trading volume on Decentralized Exchanges (DEX) rose from $4.5 billion in July to $11.6 billion in August, up 160% year-on-year, setting an all-time high for the third consecutive month.
The DEX trading platform Uniswap trading volume reached $6.7 billion in August, an increase of 283% year-on-year, the recent daily trading volume is more than the centralized platform Coinbase for many days.
September 2 data, DEX trading platform Uniswap 24-hour trading volume exceeded $1.59 billion, Coinbase 24-hour trading volume of $655 million, the former reached 2.43 times of the latter.
With the popularity of Uniswap, some people believe that the decentralized exchange (DEX) robbed traffic from the centralized exchange (CEX).
If you participate in DeFi through DEX and CEX, you will think that this is completely a layman’s view. CEX and DEX complement each other, both of which together promote the liquidity of the DeFi trading market. It can be said that CEX is the bridge between the secondary market and DeFi, together with DEX thriving DeFi ecological market.
In DeFi, there are farmers (miners who provide liquidity to DEX), secondary market traders, DEX and CEX.
After a DeFi project becomes a hit, there is bound to be a high-yield trading demand in the secondary market, where traders earn profits by trading in CEX. Therefore, before and after a DeFi project token listing on DEX, there will be a large number of secondary market traders (demand side) buying DeFi project tokens at a lower price through DEX from farmers. Farmers as a producer or supplier will dig DeFi project tokens in DEX and sold to secondary market traders.
After secondary market traders bought tokens, they will wait for the token to reach a certain increase, and then sell tokens to other traders in CEX at a higher price. The traders in the secondary market act as a wholesale agent.
CEX and DEX act as trading services (mediums). At present, MXC Exchange and Uniswap are the largest traffic platforms for DeFi ecological tokens trading. They can be viewed as DeFi traffic leaders of CEX and DEX.
At Uniswap, there are 199 DeFi trading projects, of which at least 50 or more are high-quality DeFi projects listed by MXC (incomplete statistics).
Let’s first look at the five projects recently listed by MXC: YFII, SUSHI, YAMV2, YFV and CVP, the highest increase after listing reached 18.7 times, 9.5 times, 5.5 times, 3.26 times and 3.6 times, respectively.
Since the cost of secondary market traders to acquire tokens on DEX is usually lower than the opening price on CEX. After the opening of these tokens on the secondary exchange, as the price rises and falls, secondary market traders have lots opportunities to gain profit, which also promotes the liquidity of the secondary market.
On the other hand, these projects have achieved price increases before listing on CEX. Taking YFV as an example, it was listed by MXC on August 30. 10 days before its listing, it has reached 201.7 times increase (although the first transaction volume on DEX is small).
This increase amount is determined by supply and demand between secondary market traders and farmers. With a DeFi project gradually getting popular, the project side will choose an appropriate opportunity to list the token on CEX. Then, lots of traders will emerge in the secondary market to recharge ETH pending orders on DEX to buy the token. Once transactions are done, the farmers can get profits, and traders will turn to the secondary market.
This has formed a cycle of prices rising. Secondary market traders buy tokens rom DEX, then farmers get profit. The exchange list the token, traders get profit after price rising. CEX has formed a ‘DeFi effect’ for it has a first-mover advantage. With more traffic, other exchanges will also list this token, which leads to the price rising again. With the cycle setteld, the listed projects are self-regulated by the secondary market. CEX and DEX continue to mine new projects.
The AMM model, which enables automatic matching, is a major innovation in DEX, while also minimizing trade slippage. But the core factor of attracting users is Fomo feeling. It comes from the rate of return that liquidity providers may obtain in the future, and from the return may gain after the tokens listed by CEX.
For CEX, listing DeFi project tokens means to enrich the trading tokens. Just like adding cola to a shelf with mineral water only.
The listing can meet the needs of DeFi investors and promote the prosperity of the DeFi ecosystem. Without the secondary market, when a DeFi project token listed on DEX, it will be limited to a small number of people. CEX functions as a bridge to connect DeFi and ‘external investors’, to lower the threshold for new traders.
As stated above, CEX and DEX do not produce traffic conflicts, but complement each other to promote the development of the DeFi ecosystem.