Although building a financial market that has grown behind the narratives of decentralization, the cryptocurrency industry’s liquidity is mostly concentrated among just a few centralized exchanges (CEX).
In 2023, 91.7% of all the crypto market liquidity lies in the hands of only eight global entities: Binance, Coinbase, Kraken, OKX, KuCoin, Bybit, Binance.US, and Bitfinex. This is what a new report by Bankless Times noted on September 15.
Interestingly, the smart data platform Kaiko also recently reported a similar value of 91.7% of the entire liquidity concentrated among the eight largest centralized exchanges, and 58.5% of this liquidity is kept by two of them. Things get even worse when looking at the traded volume, 64% is dominated by a single CEX.
Notably, the crypto market liquidity and trade volume have become more centralized since 2021, as by then, the dominant CEX only had 38% of the entire trading volume. And the current 65% was performed over the four largest entities instead of a single one.
This shows a worrying tendency of centralization in the last two years, instead of what would be expected to be a growing decentralization to a space built within these values.
Liquidity concentration is a double-edged sword
“Liquidity concentration is a double-edged sword. It can offer some clear advantages, but it also poses significant risks. The crypto community must find ways of addressing its risks without sacrificing the benefits.”— Alice Leetham, a crypto expert at Bankless Time
According to Bankless Time, this ‘dominance’ tendency happens because these entities had the ‘first mover advantage’, earning the trust of users over the years, and also listing a higher variety of good liquidity pairs of cryptocurrencies. Not only that, but they are also able to invest in better technology for a more reliable service.
Moreover, the more liquidity a CEX has, the more liquidity it will attract, as traders and investors usually look for liquidity and trading volume when choosing their services to use.
However, it also creates a riskier environment of dependency on these dominant entities. These are called “centralization vulnerabilities” by experts, which are composed of single points of failure that can affect the entire space if negative events happen at these frontiers.