Centralization, transparency, autonomy. This is why over 500 Bitcoins have left traditional exchanges, continuing a mass exodus to self-custody wallets.
Yet, despite several CEX disasters chaining from 2022, 8 centralized exchanges dominate the crypto market liquidity.
As convenient as it is to trust the most popular crypto exchanges, this exposes investors to the same old risks of custodial finance. Far from decentralized, this liquidity is concentrating even more, with 64.3% of the global trade volume coming from Binance.
Market Depth Dominated By Offshore Crypto Exchanges
According to the Kaiko Crypto Liquidity Concentration Report for 2023, 8 exchanges generate 89.5% of the global volume: Binance, OKX, Coinbase, Upbit, Bybit, Kucoin, Huobi, and Kraken.
Kaiko also compared their market depth for the top 30 altcoins by market cap. Results show that 71% appears from off-shore exchanges like Binance and OKX, a 6% increase from 2022. The remaining 29% derives from 3 US exchanges, revealing even more centralization.
Coinbase, Kraken, and Bitstamp concentrate 93.8% of the altcoin market depth.
Now, why do these exchanges keep concentrating the world’s crypto liquidity when decentralization is the essence of blockchain? And why is the decentralized exchange volume (DEX) one-sixth of the custodial ones?
The question is, are they really that different?
The State of Web3 In 2023
According to TheBlock analytics, the DEX spot trade volume is 15% of the total CEX volume, with occasional deviations of 5%. More than half of this volume comes from one DEX, Uniswap v3. And in June 2023, the team announced the upcoming launch of Uniswap v4, which will likely increase this dominance.
An earlier report from Chainalisis, State of Web3 2022, highlights how 5 DEXs control 85% of all on-chain volume in Ethereum Mainnet: Uniswap, the SushiSwap fork, Curve Finance, dYdX, and the 0x Protocol.
Even though there aren’t central entities behind these exchanges, there are fewer DEXs controlling on-chain liquidity than CEXs controlling off-chain transactions.
As the crypto on-ramp of choice, the top custodial exchanges also gain trading volume from these DEXs. Especially the ones with minimal fees, hundreds of token options, and Web3 projects like BnB Chain and Base.
Binance and Coinbase have both lost 6.35% and 13.4% of liquidity according to the CCData Report for 2023 Q2. Compared year-to-date, however, the overall volume has increased both for CEXs by 23.2% and DEXs by 27.6%.
Despite its consistent lows, this crypto market seems to be recovering based on volume reports. After an in-depth analysis of this liquidity, however, research suggests the opposite, concerning conclusion.
More Than Half of Exchange Trades Are Non-Economic
Trading volume is one of the most measurable signs of investor interest. This interest is self-reinforcing and one of many motivations for exchanges to spend $15K for fake trading volume.
In particular, the NBER group detected 70% of wash-traded volume in 29 unregulated exchanges (see Crypto Wash Trading, December 2022).
These tests simply reaffirmed that the transparency problem today is as rampant as proven years before. “More than half of all Bitcoin trades are fake”, claimed the analytics director in the Forbes trading volume report (2022). After adding 157 crypto exchanges, the total trading volume was $128B on June 14th, 51% less than the self-reported $262B.
The Forbes study resumes the polarizing Bitwise SEC Presentation of 2019. Researchers discarded 95% of trades as “non-economic” to conclude that only 10 exchanges had actual volume. Out of the top 81 exchanges tracked, 71 of them didn’t make over $1M of real volume and failed one of the 3 tests (trade size, volume alignment, spread patterning).
But Bitwise only tracked transactions for Bitcoin pairs with fiat or stablecoins. If Forbes says half of Bitcoin trades are questionable, what does that say of the Top 30 altcoins?
Even if one exchange controls over half of the global trade volume, the market may not be as big as these exchanges made investors believe.