China’s crypto ban last week sent traders flocking into decentralized exchanges or DEX, with decentralized exchange tokens Sushi and Uniswap leading a rally as cryptocurrencies recovered from last Friday’s slump.
On Sept. 24, China declared all crypto-related transactions illegal, citing concerns about money laundering and gambling fraud. The price of cryptocurrencies fell on the news of China’s harshest crypto crackdown yet.
At least 18 crypto exchanges, including Huobi Global and Binance, are inaccessible in China or have announced that they are leaving the market in a rush to cut ties with Chinese users after the communist government handed down its latest ban.
Decentralized exchanges do not rely on intermediaries such as banks to allow cryptocurrency traders to buy or sell, instead offering a peer-to-peer platform where trading parties use smart contracts to execute their trades. This makes DEX an escape route for both Chinese traders and foreigners with assets in the Chinese exchanges now heading for the exit.
The largest DEX token by market value, Uniswap has seen its token price outperform most of its peers over the past week, gaining 46 percent from the Sept. 26 swing low of $18.00 to hit $26.00.
On Sept. 26, DyDx founder Antonio Juliano tweeted that business was good: “5 years ago I left @coinbase and eventually founded dYdX,” he wrote. “Today, for the first time, @dydxprotocol is doing more trade volume than Coinbase”.
Prices on other decentralized exchange tokens such as SushiSwap made similar leaps, though prices have since fallen, according to CoinMarketCap data.
Here are three things to know about how China’s crypto crackdown has benefited decentralized exchanges (DEX).
Intermediaries such as banks have regulations that mandate know-your-customer (KYC) documents when a customer sets up an account. These are essential in the financial system because they allow governments and authorities to track the flow of money.
Setting up a user account on a decentralized exchange does not require KYC. DEX only requires that you have a crypto wallet, making it easier to use. A DEX account can be set up in a matter of minutes, according to Jonas Luethy, a junior sales trader at digital asset manager Global Block. This made DEX attractive to investors exiting China and trying to find a quick safe haven.
The underlying protocol that powers all decentralized exchanges (DEXs) is automated market makers (AMMs). AMMs are autonomous trading mechanisms that eliminate the need for centralized exchanges and related market-making techniques.
Automated market makers rely on liquidity pools — big reserves of tokens, or pairs of tokens — to complete smart contract transactions when a trader sells or buys cryptos. This makes it much easier to swap from one cryptocurrency to another. The readily available liquidity of AMMs also eliminates the need for a middleman, making the transaction fees low.
Decentralized exchanges such as DYdX, offer a range of perpetual contracts on various crypto assets, allowing traders to hold leveraged positions without using contracts with a fixed expiration date. This means a user can hold more crypto tokens than they own and thus their earnings (and losses) can be multiplied.