AMM mechanism reduces market-making threshold! Uniswap liquidity surpasses Binance, Coinbase

The cryptocurrency investment firm Paradigm released a liquidity report on Uniswap today, stating that the liquidity of Uniswap v3, whether in ETH or stablecoins, surpasses that of the current leading centralized exchanges by a significant margin.

Market Depth Definition

Market depth is a commonly used indicator to measure the liquidity of an exchange's assets. In simple terms, it represents how much of one asset can be exchanged for another at a given price level. The higher the amount that can be exchanged, the greater the depth. For centralized exchanges, market depth can be calculated by summing up the orders at the same price level on the order book.

However, decentralized exchanges like Uniswap do not have an order book. Instead, liquidity is provided by Liquidity Providers (LPs) who deposit a pair of assets into a common pool, allowing traders to transact. In Uniswap v3, LPs can provide asset liquidity within a customized price range. The distribution of liquidity within this price range is similar to the market depth accumulated on the order book of centralized exchanges.

Exchange Depth Comparison

The depth comparison table for ETH/USD and ETH/BTC shows:

• On the ETH/USD pair, Uniswap's trading volume is over 2 times that of Binance and Coinbase
• On the ETH/BTC pair, Uniswap's trading volume is over 3 times that of Binance and over 4.5 times that of Coinbase
• For ETH paired with other mid-cap coins, Uniswap's average trading volume is over 3 times that of mainstream exchanges

Furthermore, the liquidity for stablecoin pairs on Uniswap v3 is much higher compared to centralized exchanges. On the USDC/USDT pair, Uniswap v3's liquidity is approximately 5.5 times higher than Binance's.

Overall, Uniswap v3 has shown significantly higher market depth than centralized exchanges in recent months, regardless of major coins or mid to small-cap coins.

Additionally, Uniswap v3 demonstrates better market depth across almost all price levels, with its liquidity advantage growing in line with expected price impacts.

Decentralized Exchanges Lowering Market Making Thresholds

Traditionally, liquidity on centralized exchanges is primarily provided by market makers. Retail traders with insufficient capital or technical expertise often face higher risks when participating in market making. However, the Automated Market Maker (AMM) mechanism of decentralized exchanges significantly lowers the barrier to market participation, making it simple and allowing participants to earn trading fees.

As a result, Uniswap can attract a more diverse range of funding sources to participate in market making, thereby deepening liquidity.