2023 DEX Recap & 2024 Outlook: Industry Evolutions & Challenges

Decentralized exchanges (DEXs) have been at the forefront of the DeFi revolution since the beginning — and have remained so throughout the years as the leading segment in terms of users and financial activity. DEXs have brought about a paradigm shift in how people perceive and interact with financial systems. In particular, DEXs offer another pathway to exchanging currencies, trading cryptocurrencies, investing in cryptocurrencies, and partaking in other Web3 decentralized applications (DApps).

In this article, we’ll provide a comprehensive overview of the DEX market, highlight the industry’s major developments and challenges, dive into the five most prominent DEXs in 2023 (Uniswap, Curve, PancakeSwap, Raydium, Covo), and provide a glimpse into what the future holds for DEXs.

Introduction To DEXs: The Basics

Decentralized exchanges (DEXs) are smart contract-based platforms that enable trading of digital assets without the need for centralized intermediaries. Traditional financial transactions lack transparency and must rely on centralized intermediaries. In contrast, transactions on DEXs execute according to transparent rules set by smart contracts and provide complete visibility over the exchange process. As a result, DEXs reduce counterparty risk and increase execution guarantees.

Currently, most DEXs work as automated market makers (AMM). Instead of relying on traditional bid-and-ask orders, AMMs use liquidity pools and mathematical formulas to determine asset prices. Alternative DEX mechanisms include order books, aggregators, and hybrid models combining various approaches. Typically, DEXs generate revenue by taking a cut of the trading fees paid by traders.

Impact Of DEXs On The Overall DeFi Industry

DEXs have had a profound impact on DeFi — in particular, by democratizing access to financial services and fostering financial inclusion. DEXs have enabled peer-to-peer trading without intermediaries, allowing users to maintain control over their funds at all times, which is a significant departure from traditional financial systems where intermediaries like banks and brokers are the intermediaries that facilitate transactions. DEXs have also offered yield farming opportunities, allowing users to earn returns on their assets by providing liquidity to the platform. Furthermore, they have facilitated the rise of token economies, where users can earn and spend native platform tokens by participating in the network. This has led to novel economic models and incentives, further driving the growth of the DeFi sector.

What Were The Major Developments For DEXs In 2023?

In 2023, DEXs saw significant growth and innovation, with Ethereum maintaining its place as the foundation for this financial segment. Because the Ethereum Network is known for its robust smart contract capabilities, it has remained the popular choice to develop DEXs and for users to use. This is largely due to Ethereum’s mature ecosystem, large developer community, and a wide array of DeFi applications. Nonetheless, Alt-Layer 1s such as Solana and Avalanche began attracting significant attention in the DEX segment throughout 2023.

In addition, Layer 2 solutions on Ethereum such as Arbitrum, Optimism, and Polygon have gained traction by offering increased scalability and lower transaction fees. These solutions work by processing transactions off-chain, thereby reducing the load on Ethereum and enhancing the overall DEX user experience.

Moreover, Bitcoin, traditionally seen as a store of value, has also begun innovating in the DeFi space with the development and creation of DEXs on its network. Simultaneously, alt-Layer 1 blockchains such as Solana, Cosmos, and Polkadot have emerged as strong competitors to Ethereum. In particular, this is because these blockchains offer unique features and benefits such as high throughput, low fees, and greater interoperability, thus making them attractive platforms for building and using DEXs. At one point, DEXs on Solana saw greater daily trading volumes than Ethereum, which was the first time an alternative Layer 1 blockchain overtook Ethereum in this DeFi segment.

Nonetheless, a sneak peek into the data shows more dynamic growth which may indicate shifting sentiments going into 2024. From January 2023 to June 2023, DEX TVL remained at relatively high levels — however, beginning from July 2023 and to the end of 2023, that TVL dipped during the late summer months into the fall months and finally recovered towards November and December 2023 — which is a consequence of the improving overall market sentiment and prices at the time. Therefore, DEXs may see a resurgence in popularity in 2024 as traders re-enter the market and shift away towards centralized entities.

(Source: Artemis Terminal)

(Source: Token Terminal)

DEX Market Overview: Where Does The Industry Stand?

As of 2023, there are about 370 DEXs in existence. However, it must be noted that new DEXs constantly emerge, and others often quickly cease to exist. To no surprise, Uniswap is the king of DEXs and has maintained its dominant position in the market with over 50% of the total market share.

(Source: @hagaetc/ DEX metrics)

In addition, throughout 2023, DEXs overall transacted on average over $2 billion in total trading volume per day. Over the last 12 months as of January 2024, DEXs have reached almost $900 billion in total trading volume.

(Source: @hagaetc/ DEX metrics)

In addition, according to Token Terminal, DEXs have approximately 500,000 daily active users — and over the past 12 months as of January 2024, there have been over 40 million DEX traders, which is calculated from the total unique trading addresses.

(Source: @hagaetc/ DEX metrics)

The top DEXs by TVL and trading volume are Uniswap, PancakeSwap, Curve, Balancer, SushiSwap, and others such as DODO, Trader Joe, Raydium, and Loopring v2. Nonetheless, Uniswap holds a large lead over the market and is the go-to DEX as it has deployed its DApp across multiple blockchains and ecosystems.

(Source: @hagaetc/ DEX metrics)

A Comprehensive Analysis Of Five Popular DEXs In 2023

1. Uniswap: Uniswap is the largest decentralized exchange that reached its peak trading volume of $67.9 billion in March 2023.
2. Curve Finance: Curve Finance is a decentralized exchange optimized for efficient stablecoin trading. Despite facing several challenges in 2023, including a $50M drain due to a bug impacting Curve, it managed to record $21.9 billion in total trading volume at its peak in March 2023.
3. PancakeSwap: PancakeSwap is another leading DEX on the Binance Smart Chain (BSC) that offers features such as yield farming and lottery, in addition to exchange services. In 2023, PancakeSwap managed to grow its total trading volume from Q1 to Q2 2023 by 77%. It has doubled its market share among decentralized exchanges since the release of its V3 version — and as of December 2023, had a TVL of just over $1 billion.
4. Raydium: Raydium is an automated market maker (AMM) based on the Solana blockchain with features such as yield farming, staking, token swapping, and trading. In 2023, Raydium demonstrated a steadfast commitment to driving the evolution of DeFi and expanding the Raydium protocol ecosystem. It prepared the Raydium community for significant growth, leveraging the power of Solana. Raydium aims to capture and maintain a leadership position among AMMs and liquidity providers on Serum.
5. Covo Finance: Launched in February 2023, Covo Finance is a decentralized exchange that focuses on spot and leverage trading. It supports about 20 markets, including crypto, forex, and metals. The platform is built on the Polygon network, providing faster, more secure, and low-fee transactions. It offers up to 100x leverage trading directly from crypto wallets. Users who hold a Covo utility token can get more benefits from the exchange through staking.

Uniswap: The Titan Of Decentralized Trading

Uniswap had a stellar year in 2023, reaching new heights in terms of trading volume, liquidity, and users. Uniswap’s success can be likened to a tree growing in fertile soil. The fertile soil represents the increasing preference of users for decentralized platforms over their centralized counterparts. In the second quarter of 2023 alone, Uniswap accounted for 66.1% of the total spot trading volume among DEXs and reached its peak perpetuals trading volume of $67.9 billion in March 2023.

(Source: Artemis Terminal)

This commanding presence indicates Uniswap’s leading role in elevating the DEX market, much like a towering tree in a forest.

Uniswap also launched its highly anticipated third version (V3) in May 2023, introducing several new features and improvements, such as:

• Concentrated liquidity: This allows liquidity providers to customize their price ranges and optimize their capital efficiency and returns.
• Multiple fee tiers: This allows liquidity providers to choose between different fee levels (0.05%, 0.30%, or 1%) depending on the expected volatility of the pool.
• Oracles: This provides reliable and low-cost price feeds for any token pair on Uniswap, enabling more use cases and integrations.
• Licensing: This gives Uniswap Labs the ability to enforce the terms of service and protect the protocol from unauthorized forks and clones.

Uniswap V3 was well received by the community and quickly became the dominant version of the protocol, surpassing V2 in terms of volume and liquidity. However, Uniswap V3 also faced some criticism and challenges, such as:

• Complexity: Some users found Uniswap V3 too complicated and confusing to use, especially for beginners and casual traders.
• Gas fees: Despite some optimizations, Uniswap V3 still suffered from high gas fees on Ethereum, making it inaccessible and unprofitable for small transactions.
• Fragmentation: Some liquidity providers have complained that Uniswap V3 has fragmented the liquidity across different price ranges and fee tiers, resulting in lower returns and higher risks.
• Licensing: Some developers have expressed concerns about Uniswap V3’s licensing, which restricts the use of its code for commercial purposes without permission.

Despite these challenges, Uniswap remained the king of DEXs in 2023, maintaining its market share and influence in the DeFi space. Uniswap also expanded its reach to other layers and chains, such as Optimism, Arbitrum, Polygon, Binance Smart Chain, Solana, etc., offering faster and cheaper transactions to its users.

Curve: The Stablecoin Maestro

Curve is the second largest DEX, with an 11.5% market share and a total spot trading volume of $5.2 billion in June 2023, which represented a 73.9% m-o-m growth, having recorded $3 billion in May 2023. Currently, as of January 2024, its TVL sits at $1.7 billion.

Curve specializes in stablecoins and low-slippage swaps between similar assets. It uses an AMM model — but, unlike Uniswap, with a different curve function that minimizes impermanent loss and maximizes capital efficiency for liquidity providers. Curve also supports yield farming and governance through its native token CRV.

Curve marked a milestone by launching its own dollar-pegged stablecoin. This development is akin to a ship charting new waters, expanding its reach and influence. Curve also launched its innovative second version (V2) in June 2023, introducing several new features and improvements, such as:

• Dynamic fees: This allows Curve to adjust the fees based on the market conditions and the demand for each pool, maximizing the revenue for liquidity providers and the efficiency for traders.
• TriCrypto pool: This allows Curve to support any three assets with low slippage and high capital efficiency, expanding the range of possible swaps and use cases.
• Meta pools: This allows Curve to create pools that are composed of other pools, creating a network effect and increasing the liquidity and diversity of the protocol.
• Governance: This gives CRV holders more power and influence over the direction and development of the protocol, enabling more participation and innovation.

Curve V2 was well received by the community and quickly became the preferred version of the protocol, surpassing V1 in terms of volume and liquidity. However, Curve V2 also faced some criticism and challenges, such as:

• Competition: Some users found Curve V2 too similar to other protocols, such as Uniswap V3 and Balancer V2, and questioned its uniqueness and differentiation.
• Security: Despite some audits and bug bounties, Curve V2 still suffered from some security issues and exploits, resulting in losses and damages for some users and pools.
• Scalability: Despite some integrations with layer 2 solutions, such as Polygon and Optimism, Curve V2 still struggled with scalability and performance on Ethereum, making it slow and expensive for some transactions.
• Governance: Some CRV holders have complained that Curve V2 has centralized the governance too much, resulting in lower transparency and accountability for the protocol.

Raydium: The Rising Star Of DEXs

Raydium, an automated market maker (AMM) based on the Solana blockchain, has been making waves in the DEX sector. Raydium had a remarkable year in 2023, achieving new milestones in terms of trading volume, liquidity, and users.

One of the key developments for Raydium in 2023 was the addition of Covo Finance, a decentralized finance (DeFi) platform, to its ecosystem. This move is comparable to a train adding a new carriage, enhancing its capacity and functionality.

Raydium also launched its innovative fusion pools in June 2023, introducing a novel way of providing liquidity and earning rewards, such as:

• Dual incentives: This allows liquidity providers to earn both Raydium’s native token RAY and the partner project’s token for each fusion pool.
• Cross-chain compatibility: This allows liquidity providers to access fusion pools from different blockchains, such as Ethereum, Binance Smart Chain, and Solana.
• Auto-compounding: This allows liquidity providers to automatically reinvest their rewards into the fusion pool, increasing their compound interest and returns.
• Governance: This gives Raydium’s community the power to propose and vote on the creation and parameters of new fusion pools.

Raydium’s fusion pools were widely praised by the community and quickly became the most popular feature of the protocol, attracting more volume and liquidity than the regular pools. However, Raydium’s fusion pools also faced some criticism and challenges, such as:

• Dilution: Some users argued that Raydium’s fusion pools have diluted the value and utility of RAY, as liquidity providers have more incentives to hold other tokens.
• Security: Despite some audits and tests, Raydium’s fusion pools still exposed liquidity providers to potential risks of smart contract bugs, hacks, or exploits.
• Competition: Some competitors have tried to replicate or improve upon Raydium’s fusion pools, offering higher rewards or lower fees to lure away liquidity providers.

Covo: The New Entrant & Rising Star Of DeFi Lending

Covo, a newcomer to the DEX scene, made a significant impact in 2023. Like a new player entering a game, Covo brought fresh strategies and perspectives to the table. One of the major developments for Covo was its addition to the Polygon ecosystem. This move can be compared to a new store opening in a shopping mall, expanding the mall’s offerings and attracting more visitors.

Covo Finance also launched its innovative second version (V2) in June 2023, introducing several new features and enhancements, such as:

• Flash loans: This allows users to borrow any amount of any asset without collateral for one transaction, enabling arbitrage, liquidations, and refinancing opportunities.
• Credit delegation: This allows users to delegate their credit limit to other users or smart contracts, enabling undercollateralized loans and new use cases.
• Batch flash loans: This allows users to execute multiple flash loans in one transaction, reducing gas costs and increasing capital efficiency.
• Governance: This gives COVO token holders the power to propose and vote on protocol changes and upgrades, ensuring decentralization and community involvement.

Covo Finance V2 was well received by the community and quickly became the leading version of the protocol, surpassing V1 in terms of volume and total value locked. However, Covo Finance V2 also faced some criticism and challenges, such as:

• Security: Some users have expressed concerns about the security and reliability of Covo Finance V2, especially after some flash loan attacks and exploits on other protocols.
• Regulation: Some regulators have questioned the legality and compliance of Covo Finance V2, especially regarding flash loans and credit delegation.
• Competition: Some competitors have tried to copy or improve on Covo Finance V2’s features, resulting in lower market share and innovation.

PancakeSwap: The Innovator

PancakeSwap, built on the BNB Chain, has been a household name in the DEX sector. It’s like an inventor constantly coming up with new gadgets, keeping everyone on their toes with its innovative features.

In 2023, PancakeSwap transitioned to a deflationary token model called “Ultrasound CAKE.” This move is akin to a chef experimenting with new recipes to keep the menu fresh and exciting. The protocol passed a proposal called CAKE Tokenomics v2.5 to create a structure combining real yield and reduced token emissions.

In conclusion, 2023 was a year of significant growth and innovation for DEXs. Each platform brought unique strengths to the table, contributing to the overall development of the sector. As we move forward, it will be interesting to see how these platforms continue to evolve and shape the future of decentralized trading.

PancakeSwap comes in as the third largest DEX, capturing 9.5% of the market share and ending the year with a monthly trading volume of $9.4 billion in December 2023.

PancakeSwap also launched its innovative second version (V2) in April 2023, introducing several new features and improvements, such as:

• Auto-compounding: This allows liquidity providers to automatically reinvest their earnings and compound their returns over time.
• Lottery: This allows users to buy lottery tickets with CAKE tokens and win prizes based on the matching numbers.
• Prediction: This allows users to bet on the price direction of the BNB/USDT pair and win rewards based on the outcome.
• NFTs: This allows users to create, buy, sell, and trade non-fungible tokens (NFTs) on PancakeSwap, enabling more creativity and diversity.

PancakeSwap V2 was well received by the community and quickly became the leading version of the protocol, attracting more volume and liquidity than V1. However, PancakeSwap V2 also faced some criticism and challenges, such as:

• Security: Some users have expressed concerns about the security and reliability of PancakeSwap, especially after several incidents of flash loan attacks and rug pulls on other Binance Smart Chain projects.
• Competition: PancakeSwap V2 has faced fierce competition from other DEXs on Binance Smart Chain, such as BakerySwap, ApeSwap, and Goose Finance, which offer similar or better features and incentives.
• Regulation: PancakeSwap V2 has faced increased regulatory scrutiny and pressure from authorities around the world, especially after Binance was banned or restricted in several countries due to compliance issues.

What Challenges Do DEXs Face?

Despite the general advancement, increased development, enhanced product offerings, and rising trading activity of DEXs — DEXs still face several challenges. For example, high gas fees on Ethereum have been a persistent issue deterring many users from interacting with DEXs. However, Layer 2 solutions have to an extent alleviated this issue by processing transactions off-chain. Moreover, the nascent stage of many DEXs has led to problems around creating a friendly user interface and offering a user-friendly trading experience. As these platforms are often community-driven and open-source, they generally lack polished interfaces and user-friendly features that are found in traditional financial (TradFi) applications such as stock trading applications like Robinhood, or banking applications like Chase. In addition, security vulnerabilities are very much a concern as smart contracts can be prone to bugs and exploits. Lastly, network congestion frequently leads to slow transaction times and a poor user experience during times of high demand.

Other common challenges DEXs face include:

• Regulatory Uncertainty: DEXs operate in a largely unregulated space, which poses legal and compliance risks for both users and operators. Depending on the jurisdiction, DEXs may encounter restrictions or be required to fulfill requests related to KYC/AML, taxation, anti-money laundering, and consumer protection laws. These regulations vary from country to country and may change over time, thus creating an environment of uncertainty and complexity for DEXs.
• User Adoption: Despite the growing popularity of DeFi and DEXs, many users still prefer to use centralized exchanges (CEXs) for various reasons. For example, some of these reasons include convenience, familiarity, trust, liquidity, and security. CEXs also provide more features and services than DEXs such as margin trading, staking rewards, fiat on-ramps, and custodial wallets. Therefore, to attract more users to their platforms, DEXs need to improve their product offerings, UX, usability, accessibility, and general education.
• Technical Complexity: DEXs rely on complex technical systems that involve smart contracts, DApps, blockchain networks, cryptography protocols, and consensus mechanisms. These systems are constantly evolving and require constant maintenance and updates to ensure the platforms function properly and are secure. In addition, some users may not be familiar with these concepts and encounter difficulties in using them. To overcome this challenge, DEXs need to create more user-friendly interfaces as well as better documentation to guide users on how to use their platforms.
• Market Competition: The cryptocurrency market is highly competitive and dynamic. New entrants emerge every day with innovative products and services that challenge the existing players. On top of that, CEXs themselves are also investing heavily in developing their own decentralized solutions, and if not, are partnering with existing ones to enhance their offerings. For example, Coinbase recently launched its own decentralized exchange called Coinbase Pro which allows users to trade crypto assets directly from their Coinbase accounts. CEXs like Coinbase in addition to the others (Binance, Kraken, KuCoin, and OKX) have a large user base and significant financial resources. Therefore, to keep pace with and stay ahead of the competition, DEXs need to constantly innovate their products, differentiate themselves, and collaborate with other projects in the DeFi ecosystem.

Future Scenarios For DEXs

As for the future development of DEXs, there are several potential scenarios. The growth of Layer 2 solutions could lead to more scalable and efficient DEXs. Additionally, the integration of DEXs with other DeFi protocols could lead to more innovative financial products and services. However, these developments will likely depend on a variety of factors, including technological advancements, regulatory changes, and market dynamics.

The future of DEXs is likely to be shaped by several key trends and developments:

1. Layer 2 and Cross-Chain Solutions: The growth of Layer 2 solutions could lead to more scalable and efficient DEXs. Cross-chain solutions, like those offered by Axelar, are also expected to power up next-gen cross-chain DEXs. These technologies could facilitate faster transactions, lower fees, and improve user experience, thereby attracting more users to DEXs.
2. Decentralized Derivatives: The rise of decentralized derivatives, particularly perpetual future DEXs, is another promising trend. These platforms allow investors to trade perpetual swaps against community liquidity, providing global and permissionless access to leveraged trading products.
3. Innovative Technologies: New technologies, such as the one introduced by SmarDex, could effectively address issues like Impermanent Loss and even generate Impermanent Gain in many cases. Such innovations could enhance the efficiency of DEXs and make older platforms outdated.
4. Regulatory Developments: The regulatory landscape for DEXs is still evolving, which could pose additional challenges in the future. However, it could also lead to greater legal clarity and consumer protection, thereby boosting trust and adoption of DEXs.
5. Competition with Centralized Exchanges (CEXs): As DEXs continue to innovate and improve, they could pose a significant challenge to CEXs. However, CEXs are also developing their own decentralized solutions to stay competitive.
6. Liquidity Constraints: Liquidity is a major challenge for DEXs. Future developments could focus on improving liquidity, perhaps through incentivized liquidity provision or integration with liquidity aggregators.

These scenarios paint a picture of a dynamic and evolving DEX landscape. While challenges exist, the potential for innovation and growth is immense. The continued development of DEXs could significantly reshape the DeFi landscape and potentially the broader financial system as well.