The Bull Run of Decentralized Exchanges Points To A Potential Shift In The Storage Of Value

Siddhartha Dasgupta

October 7, 2020

When we look at the history of money, we can clearly understand the concept of bartering, which is defined as an act of exchange between two commodities.

The terms of exchange was based on need, somebody would need bread and he or she would exchange it for beads or cowrie shells.

Commodities stored value when the barter system was in place. From the barter system in the bronze age, we have come a long way in terms of storing value. 

While commodities are still traded, the market of value exchange has moved far beyond commodities.

Historically, as humankind evolved and discovered many things, value was stored in oil and gold.

There’s still reliable value stored in gold and oil across the world. $9 Trillion is gold’s global market cap! The annual value of global oil market stands more than $1.8  Trillion. 

However, in the past 75 years, the US dollar has been the de facto reserve currency of the world and it has grown tremendously over the years, primarily due to the great management by the Federal Reserve coupled with the strength and the reputation of the US economy. 

Globally, more than 60% of global forex reserves is held in US dollar. Overall, in 2019, the global currency reserves amounted to $11.8 Trillion, out of which, a little more than $8 Trillion was held in US dollars. 

Advent of Digital Currencies and Decentralized Exchanges 

While Gold, Oil and the US Dollar remain the foremost assets where value is stored across the world, in recent times some of the value has been shifted to digital currencies and now with the trades in Decentralized Exchanges.

DeFi is poised to radically transform the global financial services landscape. To put some numbers to the paradigm shift and acceptance of Decentralized exchanges, the volume rose by over 100% in July and over 150% in August, beating consecutive records.

Currently, the aggregate trading volume has reached well over $11.6 Billion. If one looks at the market cap of all digital currencies, it currently stands at $355 Billion.

The numbers might fade when you compare Digital Currencies and Decentralized Exchanges to Oil, Gold & the US Dollar, but the growth for blockchain based ecosystems have largely happened in the past 10 years.

Its still early days for decentralized exchanges as with the whole DeFi (Decentralized Finance) movement, which basically aims to provide traditional financial services such as derivatives, lending, assets etc. by way of a DeFi project. The listing of such projects in an exchange that runs on a blockchain, is known as a Decentralized Exchange. 

Why the need for Decentralized Exchanges ?

The answer lies in security. Since the fundamental selling point  of any cryptocurrency or a digital asset is the security of the asset itself, a centralized exchange potentially defeats that purpose.

Exchanges such as Coinbase, Binance or Huobi have rather vulnerable operations. Funds can be stolen from these exchanges, potentially.

The wallets where the currencies are stored can be hacked as well. It has happened too, between 2011 & 2018, about $1.4 Billion were stolen from centralized exchanges, through a total of 31 hacks. 

Some of the successful DeFi projects have been Uniswap, Maker and WBTC spread across the category of exchanges, lending, and assets.

What’s interesting to note is that all DeFi projects built so far, has been on the Ethereum Blockchain.

The growth of DeFi has made Ethereum transaction fees soar and made the DeFi entry point awfully expensive, leading to some analysts predicting that the DeFi game is only for the wealthy. 

The Future

By and large, the financial community has accepted the benefits of digital currencies and the applications/projects which give rise to these currencies.

The emergence of DeFi projects has been a paradigm shift for the crypto market itself, let alone the traditional capital markets. 

The industry therefore needs to decide how it wants to grow with DeFi & Decentralized Exchanges(DEXs).

Certainly, the applications that can be built with a DeFi project has the potential of larger societal benefit, provided the entry isn’t overpriced. 

At some point in time, we need to explore the idea of building DeFi projects based on an alternate blockchain, beyond Ethereum.

To keep the prices in check, do we need to have a decentralized regulator? These are questions which only time will answer, but at least we can safely say that we are living through fundamentally transformative times within the financial services realm and certainly value is being stored beyond the traditional assets.  

Source: Winklevoss Capital, Nasdaq, Messari, TradeBlockStatista, CoinGecko, DeFi Pulse 

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About the author
Siddhartha Dasgupta

Contributing Author

Sid has been a content solutions evangelist and a digital marketer for 10+ years. Having written for brands such as IBM, Infosys and other technology corporations and startups, he is always at the cutting edge of researching & writing about emerging technologies.

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