The moat of DEX: A protracted battle over liquidity

Decentralized exchanges (DEX) are cornerstone applications in the DeFi ecosystem. Uniswap is a typical representative of this application.

In the crypto ecosystem, the vast majority of projects are open-source, and their code can be used freely, and DEX is no exception. Before Uniswap V4, in terms of actual technical implementation, Uniswap did not have substantial technical barriers compared to its competitors.

In terms of the types of services offered, before V4, Uniswap was not fundamentally different from its competitors; there was basically no segmented service that only Uniswap could provide while competitors could not.

In this case, where is Uniswap's moat?

It lies in liquidity.

Perhaps due to seizing the market opportunity or the team's precise and efficient management, these two applications quickly captured the liquidity of emerging tokens during the booming DeFi era, especially with the surge of project tokens, allowing those new tokens to establish liquidity on Uniswap first.

When people want to trade those long-tail tokens on-chain without barriers, Uniswap can provide the best prices. Therefore, in on-chain trading, Uniswap became the first choice for many.

During that wave of DeFi, this positive cycle continuously compounded, forming Uniswap's brand effect in the DEX space. The immense liquidity of the tokens it held became its moat against competitors.

However, can this moat's advantage be sustained?

Looking back now, it seems not easy.

In the bear market that began in 2022, as the ecosystem quieted down, with no new generation projects emerging and no new high-value tokens appearing, the moat of these two projects has been continuously weakening.

Let's first look at DEX represented by Uniswap.

A typical challenger is Raydium.

In this round of market activity, pump.fun gave rise to a large number of meme coins, and the liquidity of these meme coins was automatically injected into Raydium, allowing Raydium to become a rising new DEX in this wave of market activity.

The pump.fun team saw this, so it was only natural to think, why let outsiders benefit from such a good thing? Instead, I might as well build a DEX myself.

Recently, when Binance began to focus on meme coins and attracted considerable traffic and attention, Pancake also showed significant improvement, becoming the first choice for trading these meme coins. This is also an effect triggered by liquidity.

This also explains why there is almost a DEX strongly supported by a platform provider on every layer-2 expansion of Ethereum.

Because once their expanded ecosystem can thrive and a batch of new generation projects and high-value tokens emerge, when the liquidity of these new high-value tokens is directed to the DEX they support, this DEX will inevitably become the first choice in the ecosystem. Such a DEX can not only obtain stable revenue but also help the ecosystem firmly lock in liquidity. Uniswap has almost no advantage in such an ecosystem.

Uniswap must have seen this crisis as well, which is why it launched the V4 version with additional restrictions, hoping to attract more market makers to establish liquidity by allowing liquidity providers to customize trading methods more flexibly through technological innovation.

Additionally, I have a feeling that regardless of the purpose, it is only a matter of time before DEXs extend their reach into RWA, as the existing liquidity has been mostly captured, and they can only turn their sights to new fields.

In the long run, the development path of the crypto ecosystem is still long, and I firmly believe that new top projects and high-value tokens will continue to emerge in the future.

In terms of on-chain trading, the competition for liquidity of new high-value tokens will undoubtedly be an unending and fiercely contested protracted battle.

From the scale and characteristics of this protracted battle, it seems that establishing a moat for DEX is not easy, or even if it can be established, building it to be profound and lasting is not an easy task.