DEXs and Market Efficiency: Exploring the Decentralized Price Discovery Process

Transcript

hi everyone thank you so much for coming to my talk today at ecc it's the second year in a row that i've presented here my name is clara i am the research director at kyco uh so essentially i analyze markets all day um but kyko is a cryptocurrency market data provider uh we've been around since 2014 and today we collect data from more than 100 both centralized and decentralized exchanges this ranges from coinbase to binance to uni-swap to curve so i'm very excited to do some analyses today looking at keiko's newly launched dex liquidity pack today we collect all mints burns and swaps from some of the most liquid decentralized exchanges um on the ethereum blockchain and this is by far

the most granular data that exists in cryptocurrency markets today so first we are two years out from defy summer this was the summer of 2020 and we saw record inflows and interest and general enthusiasm for decentralized protocols and exchanges this was the first time that dexes actually proved their ability to effectively foster price discovery so what has changed since then for one ethereum transaction fees are actually at multi-year lows now so that's definitely helped dexes over the past few months uh but today i'm going to focus on two key market trends that have happened over the past few months the first is the collapse of u.s terra and

the terra block chain and then the second is the staked ether discount and i'm going to specifically look at the role of dexes in these two very pivotal market events but first my favorite chart here we have uniswap's market share compared to coinbase um and this is just since january 2022 we can see that it has increased from 25 to nearly 50 so at this point uni-swap and coinbase have almost equal daily trading volume this is huge for decentralized exchanges what has caused such a sharp shift in market structure i'll get to that later in the presentation but overall i think very positive for the entire d5 industry but again all

trends need to be viewed in context so overall dexes still don't account for that much market share of total volume here i've charted total dex volume compared with just the top three centralized exchanges these are binance coinbase and ftx um and again these are only ethereum-based dexes but ethereum-based x's still account for the majority of total volume we can see here that binance accounts for the vast majority of total global market volume so again it's sort of an unfair comparison but it still shows that dexes still have a ways to go in terms of market structure now let's dive into the actual state of dex activity and we can see here that it's actually

uni swap v3 specifically that today accounts for the vast majority of market share so i want to mention that today kaiko collects data from ethereum mainnet we cover the most liquid dexes there we're not covering other chains or layer twos but even when i compared data from other data providers i could see that the trend actually holds uni stop uni swap v3 accounts for the vast majority of market share so why is this i think when v when uni swap launched their concentrated liquidity it very quickly siphoned a lot of volume away from other dexes it's a very efficient way to allocate capital and it's very competitive to curves stable stable swap invariant so overall that was just the first part

of this presentation just showing the state of dex market structure today uni swap v3 is dominant but of course binance is still the dominant exchange um indexes still have a weight ways to go so now we're going to dive into the first of two market trends that i'll look at today this is the state in the role of dexes as the ust stablecoin collapsed specifically how they facilitated record high stablecoin volume so as ust d-pegged as the entire market ecosystem reacted to this cataclysmic market event we had record high stable coin volumes here i've charted the aggregated usdc ust trading volume this is the most liquid stable coin pair that

exists in crypto across all exchanges we can see that on may 12th volumes surged to record highs and this was right as ust completely de-pegged usdt also started trading at a discount so what's the role of dexes during this huge market event here i charted the total market share of volume within this specific currency pair so this is all usdc usdt pairs the orange exchanges those are centralized and then the blue tones are decentralized we can see here that dexes actually play an inordinate role in total market share for stable coin swaps and i think this is really interesting because it shows that although dexes don't have market share for global

volume they have actually found a niche in stablecoin swaps and today account for almost a majority of market share binance still holds the top spot but uni swap v3 and curve hold the second and third places but again a dex is only as good as its ability to foster efficient price discovery so here i've charted the actual price for centralized and decentralized exchanges for again the usdc and ustt trading pair and we get an interesting trend so on centralized exchanges price efficiency is pretty good prices closely follow the others there tends to be lower slippage compared with dexes but we noticed an exception on uni swap v3 and on curve

the price actually very closely mimics that of what we saw on centralized exchanges so this just shows that a lot of dexes are actually able to efficiently foster these stable markets for stable queens it's very important you're supposed to get a one-to-one exchange rate so if you actually have volatility you're not going to get large traders that will want to use this market some other dexes they have a bit more issues when it comes to volatility for stable coins but i will say that that's more of an issue with total value locked uni swap v3 and curve actually have the highest tvl for stable queen pairs today so that's the first part of my presentation and just to summarize i think it shows that dexes have really found a niche in stable coin swaps although total market share is still

small relative to centralized exchanges so the next trend i'm going to look at specifically focuses on staked ether so for those who don't know what staked ether is you can deposit ethereum in anticipation of the merge in a protocol that issues one staked ether for each ethereum deposited so this is essentially what's called a liquid staking token it gives you liquidity before the merge happens and so after the merge happens anyone can actually redeem one stake to eat for ethereum so it's not technically a stable coin however it is expected to trade one-to-one to ethereum but as terra collapsed we actually saw a discount emerge on curve so before i dive into this discount curve was the

most liquid secondary market for staked ether before as the collapse was happening we saw that it accounted for 98.5 percent of total steeped staked ether volume so this just shows the huge role that dexes play in a relatively small cryptocurrency that ended up playing a very big role in the credit crisis that's going on today so curve again accounted for the vast majority of market share centralized exchanges had very low liquidity so here's when the discount first emerged this was right in the aftermath of the collapse we saw staked ether start trading at a discount to ether so the exchange rate went from one to one to about .98 and as markets started to collapse even further then we saw that exchange rate

dipped even lower so this is when rumor started circulate circulating about celsius's exposure to the staked ether to staked ether it came out that they had actually held a lot of user funds in staked ether and so the issue is that staked ether it's not an issue if you are a long-term holder of staked ether no matter what you can always redeem one to one after the merge but if you need quick liquidity for staked ether that's when a discount becomes a big problem because if you need to exit your position and enter a more liquid cryptocurrency which is ethereum in this case then you're not going to get a good price for your asset and you're actually going to end up with a lot of losses so as this discount worsened that's when celsius actually halted withdrawals and again it's not because

of staked ether it was actually egregious risk management on multiple different fronts that's what caused withdrawals to halt but staked ether did play a tiny role in the liquidity crisis that we see today so kyko's data lets us actually chart snapshot block by block ratio of reserves for all liquidity pools that we cover so we can actually see how the breakdown in assets in these pools evolved over time so here we see uh the staked pool on curve and we can see the 50 50 balance by may 1st but we can see that the imbalance slowly emerged over time and today it remains highly imbalanced today it's 76.24 and so we have a surplus of staked ether currently in this liquidity pool

and this is because traders are exiting their staked ether positions in hopes of getting ethereum which in this case is seem seen as a less risky asset now let's take a look at the total value locked so i always like to denominate total value locked in the native units so beware when you're looking at other dex aggregators when they're showing it denominated in us dollars because you often get price effects in play when you're denominating it in native units you can actually see the raw number of crypto assets held in these pools so here even though it's not denominated in usd we can see that there was a sharp drop off for both the staked eath pool and the three pool which are two of the highest most liquid pools on curve but it's not just curve most dexes have also seen a sharp drop

off in total value locked across markets so i was curious did the same thing happen on centralized exchanges dexes have had have seemed to be impacted a lot by the volatility um i think dex providing liquidity on a dex is a lot different than on a centralized exchange specifically there's more risk involved with impermanent loss so to see what happened on centralized exchanges i charted the market depth on both uh on for the most liquid pairs these are the bitcoin dollar in the ethereum dollar pairs and i aggregated this across the most liquid centralized exchanges including coinbase binance us bitstamp etc we can actually see what's interesting is that market depth has increased over the past few months which is a sharp contrast to the decline in

total value locked so what this suggests is that there's fundamental differences in how market makers or liquidity providers are treating them the past few months market volatility it shows that there's just right now still a lot of risk when it comes to providing liquidity on decentralized exchanges whereas market making is sort of down to a science at this point on centralized exchanges it's almost all algorithmic at this point and we can see a sharp increase not a sharp just a steady increase in depth despite the volatility so overall to summarize the staked ether section it shows that curve played a very important role in this curve remains the primary market for staked ether and it also plays a role in exchanging a lot of wrapped assets like wrapped btc

um overall dexes they've grown a lot over the past few years they play a critical role in the exchange of stable coins and stable coins are probably the most important component of cryptocurrency market structure today so dexes are definitely crucial right now um however they still have a ways to go especially when it comes to liquidity total value locked and just the market share of global volume so that's all i have for today if you want you can subscribe to keiko's newsletters we have a monday this is our data debrief and the thursday this is our deep dive we do a lot of dex analysis we're going to be looking at a lot of our new liquidity data swaps mints and burns for different protocols if you want us to look at something in particular just shoot me an email or that's my email there and follow me on

twitter if you're interested in more charts thank you [Applause] and we have a few minutes for questions if anyone has questions thank you for uh this great talk very informative um so i was wondering when you said about the binance has the biggest volume how much is that is actually like derivatives because that increases volume very dramatically compared to dex's is that due to that or is it actual like just spot trade in volume so i just charted spot volume here okay thanks a lot not even including derivatives um thanks so i know you focused on curvy two of v1 for this uh presentation um i'm just curious if you have any

insights on like curve v2 data versus like you just want v3 or anything like that uh yeah curvy two it's coming so we don't we didn't have the data in time for the presentation but we'll have it in the next month so i really wanted to include curvy two but not yet okay no worries thanks great thank you any more questions you