Decentralized Trading Development Continues

There have been a number of interesting developments in the cryptocurrency space, but a noteworthy one is the growth of the trading platform called Uniswap. It is a self-sustaining decentralized automated market maker (AMM) exchange running continuously, whose functions no-one can stop nor intervene in. Even its creators cannot shut it down. From what I’ve read so-far, it appears that trading is anonymous: Cryptos on Uniswap are not traded party-to-counterparty. Instead, liquidity providers (LPs) make their own tokens available for others to trade against in exchange for trading fees. The tokens are aggregated into pools that the traders can comb through. The trading so far is basically crypto FX in pairs composed of bitcoins and stablecoins like DAI and FEI, usually against Ethereum (ETH). The system is ETH-based and presently can only serve tokens running atop the Ethereum network. The size and liquidity of some of these have grown enough to regard these decentralized exchanges as having the future potential to serve real trading needs. In the past year Uniswap’s liquidity has grown over 100-fold from $30 million to $4.5 billion.

Without any overseeing brokers nor other overseers, there is no possibility for trading bans and ‘circuit breakers’ that such authorities have imposed on the stock market. Brokered platforms like Robinhood recently intervened to block traders from buying shares of GameStop during its massive short squeeze, and imposed such bans previously during earlier similar events. However broad the set of assets that gets trades on Uniswap, no such interventions will happen – events like short squeezes will be allowed to run their full course. It would be interesting to see how the results then play out, however good or bad the implications, as well as the how risk management practices adapt. In addition, since participants can establish their own tokens, traders are warned to do their own research on them prior to trading.

Decentralized finance (DeFi) is unlocking liquidity in new ways. Though assets sitting around in the liquidity pools now are the more familiar bitcoins, it should be possible for make this framework accommodate the non-fungible tokens (NFTs), which I recently wrote could in the future enable commodity trading (as long as delivery no longer remain purely electronic). But the crucial market liquidity looks like it may be starting to build, and several parties are working now to expand Uniswap’s token service beyond the Ethereum standard. This step itself could change how the platform operates, but it’s still in its early phase still. The push-pull between innovation and freedom versus centralized standardization and universal control continues. I like the side where the smart and intrepid people are playing.