Polychain's Olaf Carlson-Wee breaks down the maturation of the DEX market

Decentralized exchanges have been growing at breakneck speed, with volume surging to nearly $40 billion for January 2021 — the highest level ever reported.

Just a year ago, DEX-based trading was almost non-existent, data from The Block indicates. In January 2020, a mere $600 million traded across DEXs. And DEX projects that raised tens of millions of dollars during the 2017-2018 period had little volume to show for their efforts.

So what changed? According to Polychain Capital's Olaf Carlson-Wee, a confluence of factors have played into what might be characterized as a DEX Renaissance.

First, the user experience improved thanks to wallets like Metamask. 

"So one, you needed distribution and this is primarily in the form of wallets like, say, Metamask," he said. "If you remember the early Ethereum days, people weren't using Metamask as much and they were mostly using kind of desktop Ethereum browsers that kind of doubled as full nodes and it was a clunkier user-experience for sure."

There's also more liquidity on DEXs, resulting from more tradable assets being offered and new innovative ways to incentive liquidity — such as governance tokens.

As Carlson-Wee put it during the latest episode of The Scoop:

"Also, DeFi depends on there being different Ethereum compatible assets that are interesting to trade and use. 2017, I don't think there were ten ... They represent some sort of right to cash flows in the way that a lot of these DAO assets do. Things like Compound's tokens or Uniswap's token or Sushi's token all do. In addition to that, there's a real tech breakthrough. Uniswap introduced this automated market maker model that substantially increased the liquidity available to trade against and one of the big reasons volumes have been higher."

Listen to the full conversation with Polychain's Olaf Carlson-Wee below.