The foremost Ethereum-based decentralized exchange, Uniswap, has garnered much traction in recent weeks due to the growth in the decentralized finance (DeFi) space.
As reported by CryptoSlate previously, the decentralized exchange, better defined by the term “automated market maker,” has been processing over 100,000 transactions each day. This amounts to around 1.2 transactions every second. For context, Bitcoin processes around 325,000 transactions a day at around 3.6 transactions per second.
The exchange is also regularly processing trade volume nearing that of mainstream companies like Coinbase.
Despite this success that Uniswap has seen, one prominent venture capitalist says that Uniswap may eventually become “unbundled.”
How Ethereum’s Uniswap could become unbundled over time
Haseeb Qureshi, a managing partner at Dragonfly Capital that formerly worked at Airbnb and Earn.com, says that despite Uniswap’s primacy in the decentralized finance space and Ethereum as a whole, it could soon be “unbundled.”
“Uniswap today is the single largest “exchange” on DeFi. It routinely posts volumes larger than most centralized exchanges. Uniswap has revolutionized DeFi, brought billions of dollars in trading volume, and sparked a Renaissance in AMM (automated market maker) design. But I believe it’s inevitable that Uniswap is going to be unbundled.”
That’s not to say that Uniswap will collapse entirely, but that its components may be split up amongst applications.
Qureshi explained that Uniswap has four key components or features. In his words:
- Decentralized inventory provision
- A fixed fee model (specifically, a flat 0.3% fee on each trade)
- Always-on price quotes
- A constant product pricing function (
x * y = k)
Uniswap is today the largest DEX in DeFi, and trades more volume than most centralized exchanges. But I believe that it’s inevitable that Uniswap is going to be unbundled.
Here’s what I believe the future of on-chain market making will look like:https://t.co/FGvvfN0rRr
— Haseeb Qureshi (@hosseeb) August 20, 2020
Although these features working in tandem has allowed Uniswap to become one of the most popular decentralized applications ever, the investor argues that by separating these comments, “the design space of on-chain market-making opens up.”
His explanation for this thesis was extensive, but he thinks that over time, DeFi traders will see more efficiency in using platforms like 1inch, which aggregates prices across trading platforms. Retail users, he explained, will use aggregators over Uniswap because market makers may be able to outcompete “simple AMMs” due to better user experience:
“If even a few market makers set up shop in DeFi and start offering programmatic, permissionless quotes, they will outcompete simple AMMs. Over time, normal market makers will win over almost all of the retail flow, which will leave most AMMs with primarily arbitrageur volume.”
What are the second-order effects?
The biggest second-order effect of aggregators overtaking AMMs like Uniswap, according to Qureshi, will be that DeFi will begin to encroach on the market share carved out by centralized exchanges like Coinbase.
“As DeFi offers them more of the same things that centralized exchanges do, eventually there will come a day when it no longer sounds so strange for DeFi to eat CeFi. I expect it will happen later than most DeFi people think. But it will also happen sooner than most CeFi people think.”