Transaction volume in Ethereum decentralized exchanges bounced back even as cryptocurrency prices retreated.

Ethereum DEX had robust activity

According to DeFi Llama, the volume in Ethereum (ETH) rose by 18% to $9.88 billion as that in other chains retreated. Solana (SOL) DEX volume retreated by 8% while Base, BNB Smart Chain, Arbitrum, and Polygon fell by 4%, 14%, and 10%, respectively.

The worst-performing chain was Tron (TRX) whose volume fell by 52% to over $642 million. This decline happened as the popularity of the recently launched SunPump meme coins eased. According to CoinGecko, most of the SunPump tokens like Sundog, Tron Bull, and Muncat have retreated from their all-time highs.

Most DEX networks in Ethereum’s network had a big increase in volume. Uniswap’s volume rose by 14.2% to $5.7 billion after the company settled with the Commodity Futures Trading Commission over its margin products. It agreed to pay a $175,000 fine and stop offering these solutions in the US.

Curve Finance’s volume jumped by 68% to over $1.48 billion while Balancer’s, Hashflow, and Pendle rose by 68%, 196%, and 85%, respectively. 

Bitcoin and most altcoins tumbled

This volume happened in a difficult week for the crypto industry as most assets dived. Bitcoin dropped to $52,550, its lowest point since Aug. 5 and 26% below its all-time high. Ethereum also dropped below $2,200, down by over 44% from its highest point this year. The total market cap of all coins dropped below $2 trillion for the first time in months. 

There is a risk that the sell-off will continue as a sense of fear has spread in the market as the crypto fear and greed index has dropped to the fear zone of 34. Cryptocurrencies tend to see more weakness when investors are fearful.

DEX and CEX exchanges also experience weak volume in periods when cryptocurrencies are falling. According to DeFi Llama, the volume in Ethereum DEX platforms dropped to $49.5 billion in August from a high of $69 billion in March as most coins jumped. 

The same happened across other DEX platforms as volume fell from over $257 billion in March to $240 billion in August.

Looking ahead, cryptocurrencies may benefit from the upcoming start of interest rate cuts by the Federal Reserve. Data released on Friday showed that the unemployment rate fell slightly in August to 4.2% while the economy created 142k jobs. Risky assets tend to bounce back when the Fed is cutting rates.

As we start to see renewed interest in crypto—with prices hovering near their all-time highs and prominent people and institutions discussing the industry—building a robust crypto exchange is essential.

Crypto traders’ standards for an exchange are higher than ever. They are looking for a sleek user experience, architecture that supports high throughput and low latency, and top-notch security. The latter is especially important given the industry is still recovering from the implosion of FTX and the domino effect it had on other businesses in the space. 

While centralized exchanges excel at building beautiful user interfaces and intuitive user experiences, they operate at speed by custodying users’ funds for them. As the industry has seen many times throughout crypto’s history, funds that the users themselves don’t control can be mismanaged by fraudulent actors. Additionally, CEXs possess the authority to limit access to accounts, such as freezing funds or halting withdrawals. As the crypto adage goes: Not your keys, not your coins. 

Decentralized exchanges, on the other hand, grant users complete control over their funds with self-custody. They leverage blockchain technology and smart contracts to execute trustless trade and settlement. However, this architecture can be clunky and complex for users to navigate. It comes with trade-offs in throughput and latency, the absence of advanced trading features (like advanced order types and conditions), and can also deal out significant fees to pay gas for settlement on a blockchain. 

A new crop of crypto entrepreneurs is thinking about exchange architecture differently. They are looking to combine aspects of a centralized and decentralized exchange with building on the best of both worlds. Enter hybrid crypto exchange. 

A better trading engine for a better crypto trader

CEXs from the last cycle, including Coinbase and Binance, built their businesses by copying the UI of broker platforms and mimicking the mechanics of broker platforms and the UI of fintech apps. They focused on user-friendly UI, robust mobile apps, competitive fees, and an extensive selection of coins and tokens. 

The centralized trading infrastructure offers high throughput and low latency, which is what the world demands for crypto trading. Going deeper, high throughput and low latency enable better liquidity, as market makers can reprice quicker. They also allow for more efficient margin usage, as a centralized risk engine enables the exchange to offer higher leverage. Centralization enables advanced trading features and logic, such as advanced order types and conditions. 

Aside from performance, it allows exchanges to have more control over compliance. CEXs control what customers have access to their platform and can manage the access of those users by implementing robust blockchain analysis, fincrime, and compliance programs. In the wake of FTX, lawmakers and enforcement agencies have been clamping down on the industry, dishing out huge fees and even jail time to businesses and entrepreneurs that are found to be skirting regulations. 

So, to sum up, that’s why the hybrid exchange model inherits the bright side of centralization. The trading architecture is kept centralized to a large extent. UX is also inherited from CEX because DEXs simply lack features, such as simple account creation, which eliminates the need for users to already have a wallet before interacting with the exchange. DEXes are also limited in their on- and off-ramps, fee abstraction, and advanced trading analytics. Especially as another batch of crypto traders enters the space during what appears to be the beginning of a bull run, a powerful feature set on top of a polished user experience is critical. 

It all sounds like a flawless victory for centralization so far. The question is, what do hybrid exchanges inherit from decentralized ones? The answer is simple: The essential feature that enables trust in crypto trading. And centralization has a dark side.  

Give users the keys

Hybrid exchanges still pull from DEX concepts by utilizing blockchain technology to secure funds. Users self-custody their funds, and trades are settled on the blockchain at various periods. Another crucial trait is the on-chain validation of the trading logic, which will prevent operator fraud. As such, trust is provable, and transparency is immutable. 

Operator fraud is one of the most significant risks in crypto. CEX’s control over funds is beneficial for compliance reasons; however, it grants the authority to limit access to accounts, such as freezing funds or halting withdrawals. The collapse of FTX certainly heightened concerns over an operator’s access to user funds. Yet, FTX wasn’t the first or only exchange to mishandle user funds and call into question the CEX model. One of the first-ever crypto exchanges, MtGox, completely shut down and filed for bankruptcy in early 2014 because of an undetected theft over many years that drained the exchange of more than 850,000 Bitcoin (BTC). In 2018, Canadian exchange QuadrigaCX went dark and was later revealed to be a Ponzi scheme, causing the loss of roughly $190 million in user funds. 

These continued instances highlight the importance of self-custody and trustless on-chain settlement, whereby users hold the keys to their own coins instead of trusting a centralized entity that isn’t fully transparent to retain their keys. 

Scaling tech for cutting costs

In the derivatives market, traders often transact in large volumes, which can accrue significant fees. There is no feeless trading. CEXs and DEXs charge fees for trading, but DEX users have an additional cost to settle all their trades on a blockchain. These fees fluctuate depending on the overall usage of the blockchain at any given period. Earlier this year, in March, Ethereum transaction costs skyrocketed to nearly a two-year high due to increased speculation in meme tokens.

The hybrid exchange approach simplifies the fee structure because trading is centralized and relies on layer-2 technology to boost scalability while keeping transaction fees low. Rollups are one such scalability solution that processes transactions on a separate network before bundling the transaction data into batches to submit and settle to the main chain. 

Now’s the time to go hybrid

Blending features from centralized and decentralized exchange architecture is an obvious choice in a market that’s becoming more mature and competitive. 

The speed, usability, and design of CEX help users of all levels of technical know-how trade crypto easily. And the security provided by implementing aspects of DEX will create an ecosystem of trust and reliability that gives users peace of mind. 

The hybrid crypto exchange is poised to be the winning business model in the next bull run, highlighting that it’s not always about reinventing the wheel as much as it’s about creatively putting the pieces together. It’s not a one-size-fits-all industry; it won’t have a one-size-fits-all solution.

Ruslan Fakhrutdinov

Ruslan Fakhrutdinov is an ex-McKinsey consultant and former Head of Crypto Operations at Revolut. Ruslan played a significant role in the development of numerous crypto products. He had P&L responsibility for one of the company’s largest and most profitable departments, which generated £220 million in gross profit in 2021. In 2023, Ruslan left the fintech giant to launch his own venture, X10, a hybrid crypto exchange.

Historically, centralized exchanges like Binance or Coinbase have battled over the title of the most popular crypto trading platforms. These exchanges influenced the landscape of digital asset trading, attracting both newcomers and seasoned investors. However, reliance on CEXs has not come without drawbacks.

The risks of hacking, operational failures, misuse of funds, and regulatory crackdowns have prompted traders to reassess their options and explore alternatives that offer greater security and autonomy. This is part of the appeal that leads investors to decentralized finance.

Unlike its centralized counterparts, a decentralized exchange allows users to trade directly from their wallets, giving them complete control over their private keys and funds at all times. 

It may seem like ancient history, but let’s revisit the infamous fall of FTX. As a CEX, FTX was one of the most prominent centralized platforms in the industry, but its fall from grace was the final straw that broke the camel’s back. After that incident, some traders were convinced that CEXs were far too risky, leading them to explore the advantages of other platform types.

DEXs mitigate the risk of hacking because they don’t hold onto user funds. Instead, transactions occur between the user through smart contracts, reducing the threat of cyberattacks. By eliminating the need for centralized intermediaries,

DEXs significantly reduce the risks associated with hacks, fraud, and custodial failures, allowing users to trade directly without compromising on ownership or security. This model empowers users with greater asset control while fostering a more secure trading environment. And traders are starting to take note. 

The DEX to CEX spot trade volume ratio is projected to reach a new record of 13.76 percent in July. This ratio reflects the proportion of trading activity occurring on decentralized platforms compared to centralized ones. 

Improved liquidity and enhanced user experience are just a couple of factors that have prompted crypto traders to start investing their money in a decentralized manner, embracing the truly autonomous and transparent nature of cryptocurrency. However, DEX platforms have their own shortcomings to sort out. 

With hundreds of DEXs on the market, traders may face challenges like inconsistent liquidity levels, varying transaction fees, and complex user interfaces deterring new users from exploring the emerging ecosystem. Consequently, some decentralized platforms have set out to tackle these weaknesses, such as Astrovault, an automated market maker, aiming to generate revenue directly from its liquidity pools. Unlike traditional DEX platforms, Astrovault employs a new operational approach, reducing its reliance on external liquidity sources and allowing for a more sustainable and resilient model with which users can interact.  

Another DEX eschewing the expectations of what a decentralized platform can be used for is QuickSwap, which has grown to become the top asset exchange on Polygon. What is the key differentiator here? QuickSwap hones in on practicality, giving users an incentive to use it beyond trying to earn a yield. By offering services like bill payments via crypto or fiat purchasing capabilities, it pushes the idea of what a DEX is capable of providing its user base while encouraging continuous usage.

While the transition from centralized platforms to decentralized ones won’t happen overnight, recent advancements in the industry underscore the increasing momentum toward this shift. As technologies evolve, they pave the way for more user-centric and transparent financial systems. This progress in trading not only enhances security but also empowers users to take greater control of their assets.