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Uncovering DeFi Fundamentals: Decentralized Exchanges

Fundamental analysis of decentralized exchanges
Binance Research (Jie Xuan Chua, CFA)


  • Most trades today are still conducted through centralized exchanges. The DEX/CEX ratio rose from 6.8% to 15.3% in 2021 but has declined from its peak of 16.5% in January 2022 to 13.0% in July 2022. The year-to-date fall is likely contributed by an overall decline in DeFi activity this year. Nonetheless, the DEX/CEX ratio today is still nearly double that of the beginning of 2021.

  • Token emissions are pivotal to the growth and operations of DEXes as they serve to incentivize liquidity providers to provide liquidity to the platform. However, native tokens with minimal utility tend to see the value of the tokens erode. Several DEXes such as PancakeSwap, Curve, Balancer, and Trader Joe have increased the utility of their tokens and/or introduced locking mechanisms to reduce mercenary selling pressure.

  • We analyzed the financial data of six DEXes in this report - Uniswap, PancakeSwap, Curve, Balancer, Trader Joe, and Serum. None of the DEXes are profitable after accounting for token emissions related to liquidity mining incentives. Uniswap comes closest to turning a profit if it passes its fee switch proposal, ceteris paribus. While being loss-making is not uncommon and is similar to the playbook of early-stage startups that operate at a loss to bootstrap growth, DEXes should consider taking steps to minimize cash burn and to achieve operating profit.

  • In terms of valuation ratios, PancakeSwap generally fared better than average across most of the metrics analyzed. In terms of other financial ratios such as “Average Revenue per User” and “Return on TVL”, Uniswap, Curve, and Balancer generally performed better.

  • Looking ahead, competition between DEXes and the disruptive threat of aggregators will likely remain high. DEXes should focus on winning over liquidity providers to deepen the liquidity of their trading pools. Additionally, DEXes can explore different ways to increase user stickiness and platform loyalty (e.g. token distribution, better user experience, competitive fees etc.).

  • In a positive sign, we have witnessed the amalgamation of previously disparate worlds of DeFi and NFTs in the form of cross-adoption of technologies (e.g. the adoption of the AMM model by SudoAMM) and cross-vertical acquisitions (e.g. the acquisition of Genie by Uniswap) over the past year.

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