Coinbase's recent losses highlight the growing popularity of decentralised exchanges as a way to trade assets with greater liquidity and without the need for a middleman
Decentralised exchanges such as UniSwap and Pancakeswap have emerged over the last number of years to challenge incumbent centralised exchanges such as Coinbase (COIN) and Binance.
Competitive pressures in the crypto market are growing steadily and decentralised exchanges are starting to see increased trade volumes whilst that of Coinbase is haemorrhaging users.
Research published on May 5 by Paradigm, a crypto-focused investment firm based in San Francisco, showed that decentralised exchange Uniswap now has deeper liquidity in ethereum to dollar trades than Coinbase.
The data showed that ethereum (ETH-USD) to dollar trading on Uniswap had two times more liquidity than both Binance and Coinbase.
The report suggested that decentralised exchanges could dominate over their centralised counterparts in the future of trading for both digital and non-digital-native assets because they can "deliver higher liquidity than centralised exchanges" by using automated market makers (AMM).
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Also, a report by Chainalysis revealed how usage of decentralised exchanges such as UniSwap has grown massively since 2019.
The Chainalysis report stated: “DEXs have become extremely popular, which coincides with the explosive growth of the DeFi (decentralised finance) category in general."
The blockchain data firm revealed that the growth of decentralised exchanges, such as Uniswap, outpaced their centralised counterparts.
The report added: “We see that DEX users carry out much larger transactions than centralised exchange users.
“This is likely because DeFi is also more popular in countries with bigger, more established cryptocurrency markets, which also tend to be wealthier countries.”
Decentralised exchanges (DEXs) are peer to peer trading platforms that are entirely automated, and transactions occur directly between users without the need for an intermediatory.
Unlike centralised exchanges (CEXs) like Coinbase, all funds transferred on a decentralised exchange are stored on the blockchain, there is no centralised account book.
The drawback of decentralised exchanges is that they do not allow trades between fiat currencies and crypto, so users must send their cryptocurrencies to a centralised exchange to 'off-ramp' their funds into dollars.
Usage of the Coinbase centralised exchange has dropped considerably this quarter.
The company had 9.2 million monthly transacting users in the first quarter of this year, compared with 11.4 million in the December 2021 quarter.
In the first quarter ending March 2022, the centralised cryptocurrency exchange had 2.2 million fewer users than the previous quarter ending December 2021.
On Wednesday shares of Coinbase (COIN) were down 12.60% in 24 hours, now trading at
They are now trading at their lower price since the company went public a little more than a year ago.
Coinbase’s net revenue for its first quarter fell to $1.17 billion from $1.60 billion a year before.
The revenue decline came as the volume of trade on the platform slowed.
Retail trading volume on Coinbase was $74 billion, compared with $177 billion in the December quarter and $120 billion a year before.
In a letter to shareholders, Coinbase said: “We believe these market conditions are not permanent and we remain focused on the long term.
"In fact, our investment in our business now is especially critical these periods of low volatility can provide the opportunity to focus more intently on product development (as opposed to peak periods, when we are more focused on meeting high demand)."
Coinbase had previously set out to make 2022 a year of “investment", particularly in the NFT market.
Speaking on Coinbase's earnings call, Chief Financial Officer Alesia Haas said that the areas of non-fungible tokens (NFTs) and international growth would be focused on.
Hass added: “We are highly confident that we could choose profitability over reinvesting in the business.
“We could have done more of these sequentially, we could have moved more slowly and focused on profitability, but we have the resources.
“We have a disciplined approach to managing our business through peaks and valleys.”
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