In brief

  • Decentralized exchange tokens are on a tear this year, up more than 240% on average.
  • Decentralized exchanges are gaining market share relative to their centralized alternatives.
  • Even a small bump in volume could lead to outsized returns for DEX token holders.

DEX tokens are looking mighty attractive for investors these days.

A new report from Messari shows that tokens connected to decentralized exchanges (DEX), such as Kyber Network and Bancor, are up more than 240% on average so far in 2020, compared to average gains around 40% for tokens connected to centralized exchanges.

The run-ups show that despite centralized exchanges sizable lead in users and volume, there are meaningful advantagesand big potential upsidefor those backing decentralized alternatives.

The Messari report explains that much of the excitement around DEX tokens is being driven by increases in volume and recent or impending upgrades to some of the most popular decentralized exchanges.

DEX aggregators like 1inch that spread token swaps across multiple decentralized exchanges to achieve the lowest possible price have helped push total DEX volume from under $5 million to nearly $25 million when the research was released. What’s more, the increase in DEX volume has doubled the share of trading taking place across all exchanges, from 0.25% to 0.5%.

While doubling market share is impressive, it still seems like achieving the prevalence of popular centralized exchanges like Binance or Huobi is a long way off. The Messari report notes, however, that reaching parity with centralized competitors isn’t necessary for DEX tokens to offer investors a worthwhile return.

The biggest advantage of decentralized exchanges is the programmatic nature of their fee distribution modelsanyone can check on the blockchain that fees have been allocated correctly to token holders. By contrast, centralized exchanges have token burn programs in place (reducing the supply and thereby raising the price) that can be modified at any time by their parent organizations.

Upgrades to the underlying product add new features and increase the earnings potential for liquidity providers and market makers on exchanges. While centralized exchanges currently offer these users the best profit opportunities, the report sees upgrades to protocols like 0x and Uniswap as a potential catalyst for attracting these specialized market participants and the volume they bring with them. 

Since DEX trading volumes are already relatively small, a sustained increase could push earnings for token holdersand the associated value of the tokens themselvesto new heights.

Disclaimer

The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.