Exchange Protocols: Diving Deep (4 of 6)
Links to articles 1, 2, and 3…now let’s get into the exchange analysis!
Brief Introduction
In my eyes, exchanges have cemented themselves as core pieces of the crypto ecosystem that aren’t going away anytime soon.
It doesn’t matter whether you are looking at centralized exchanges (CEX) like Coinbase, Binance, FTX, Kraken, etc. or decentralized exchanges (DEX) like Uniswap, Sushiswap, 1-Inch, etc. there is certainly a lot of value changing hands.
This is well recognized by the market, examples being Coinbase’s $65b IPO and the fact that Uniswap has almost $8.5b in total value locked.
The hard part becomes enhancing the signal-to-noise ratio and finding the most promising exchanges that are primed for growth. My approach is to look again at the fundamentals for this purpose. But this time, with a heavier weighting on the following factors: volume & volume growth, revenue & revenue growth, trading/user incentives, comps, and interoperability with other platforms/blockchains.
My Exchange Picks
Curve (CRV): Curve is the largest DeFi protocol by total value locked and trading volume. The way I like to look at Curve is as the current proxy for DeFi and exchanges. In the past, I might have looked to Uniswap for this purpose, but times are changing and I am willing to change with them.
As a protocol it checks all my boxes for key metrics, operates across 7 different chains, and has seen substantial growth in the last 6 months. Oh and it’s current total value locked exceeds $50b USD at time of writing — not something to be ignored.
I mentioned in previous articles that I believe more and more projects will benefit from the increasing utility and demand for stablecoins — Curve is well positioned to do just that.
Further, I see it becoming the new standard for projects looking to incentivize their pools at launch. This will bring new users, increasing volume, and make more players interested in a positive flywheel fashion. This benefits both Curve and Convex.
It is the obvious choice in my opinion.
Uniswap (UNI): You would be hard pressed to find any self-respecting DeFi fund that does not contain a healthy allocation of Uniswap’s governance token, UNI. Why? It generates the most revenue of all exchanges, is responsible for the second-most volume, total value locked, and still maintains a respectably low multiple despite all of this.
Also important to me is that it is still growing at a respectable rate (doubled the number of monthly developers in 2021) and maintains about 35% market dominance at the time of writing.
Note: Another testament to its influence in the space is its impressive twitter following, currently around 815k.
Trader Joe (JOE): Trader Joe is a DEX residing on the Avalanche blockchain that doesn’t get as much attention as it should. It has strong revenue, volume, and total value locked metrics, and, above all, the best multiples on this list (median price to sales multiple for peer group is about 20x, whereas JOE trades at 2.3x).
Digging deeper, it’s total value locked has seen relative growth similar to heavy hitters Curve and Uniswap even though the Avalanche blockchain is nowhere near the size of Ethereum or even Binance Smart Chain for that matter.
This is a relevant comparison because I see Trader Joe becoming what Uniswap is for Ethereum, what Pancakeswap is for Binance Smart Chain, what Raydium is for Solana etc.
Considering Avalanche launched in 2020 and now has 30+ developers (a lot in crypto), I predict good things.
Trader Joe is the growth pick that could be responsible for a lot of the gains in the exchange section.
0x (ZRX): Another project I am bullish about is 0x, because it hits one of my core tenants - interoperability.
I have been pushing for projects to prioritize this element since 2015 and I think that 0x will be a strong force in the DeFi community for building cross- chain DEX tooling.
Definitely, keep an eye on this project in 2022.
Honourable mentions
dYdX (DYDX): By trading volume, dYdX is easily one the biggest players in the DEX space. It is fast, has low fees, and generally appropriately valued by the market. I do think that it is a good investment for the short and even medium term, but it doesn’t make the list because its governance tokenomics are not as favourable as other protocols which hinders its ability to appreciate heavily.
Sushiswap (SUSHI): Do I have anything against Sushiswap? Absolutely not.
But, for the purposes of constructing an outperform portfolio including both Uniswap and Sushiswap (and 1-inch for that matter) would be redundant in my opinion. I chose Uniswap for its superior revenue generation, volume, and stability. The fact that Sushi might have a slightly better comp ratio is not enough for me to replace it.
Pancakeswap (CAKE): While I did not include CAKE in my top list of outperform tokens, I still am very bullish on the project as a whole. The fact of the matter is, that Pancakeswap is a top-tier exchange by all metrics, but it suffers from unfavourable inflationary tokenomics that make it hard for the CAKE token to really perform.
My workaround? Staking CAKE for 50% APR (at time of writing) employing concurrent downside protection by shorting an equal amount of CAKE on an exchange to your staked amount. That way, you are taking a delta neutral position, but capitalizing on the high APR.
Centralized exchanges: Outside of DEX’s and other decentralized swap protocols, I also have my eye on a couple centralized exchange tokens. These are largely ecosystem coins that confer some sort of benefit within the exchange sandbox that they are issued and traded. A simple example would be discounts on trading fees if they are paid in BNB on Binance.
Some to take note of: Crypto.com (CRO), FTX token (FTT), Binance Coin (BNB), KuCoin (KCS), Huobi (HT), and OKEx (OKB).
Stay tuned for the next article in this series: Layer 1 protocols!
Full Disclaimer: The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. Kiran Malik does not recommend that any cryptocurrency should be bought, sold, or held by you.
