DeFi and DEXs Struggling Amid Market Uncertainty: PancakeSwap Takes the Hardest Hit

The decentralized finance (DeFi) is now facing a serious downturn of activity. This space had been growing quickly for the last few years, but the opposite seems to be happening now.

The price of Ethereum actually dropped a few days ago, which is bad news for DeFi, because most DeFi applications are built on Ethereum. At decentralized exchanges (DEXs), where you can trade one cryptocurrency for another, the trading volumes this week have dropped like a stone. PancakeSwap is one of the DEXs that is being hit hardest. Its losses are even worse than those at the other DEXs.

Comparison with other DEXs: Despite the substantial drop in trading volume, PancakeSwap is not the only DEX suffering. The top decentralized exchanges in the market have declined in volume over the same week, indicating an overall downturn in the DeFi sector. Uniswap, perhaps the most well-known DEX aside from PancakeSwap, has also taken a hit, dropping from around $10.9M in average daily trades last week to almost $7.6M this week. This same trend can be seen across other DEXs, including Curve Finance and Balancer. So why is it happening?

Other decentralized exchanges are not free from the market downturn, though they have not been hit quite as hard as PancakeSwap. Uniswap, the biggest DEX by trading volume, has seen a drop of 19.15% in its trading activity this week, mirroring a wider trend of declining liquidity across decentralized finance. Other big DEX names—Raydium, Orca, and Meteora—saw similar drops in their trading activity and overall volumes, with their volume drops clocking in at 12.56%, 26.58%, and 12.38%, respectively.

The general trend is a bad sign for the DeFi space, with trading volume still in decline and liquidity vanishing fast. This downturn is really an all-hands-on-deck affair, not just in the BSC ecosystem but across DeFi, suggesting that it’s more a systemic issue than a localized one. And just what are those volumes, anyway?

DeFi volumes have decreased considerably while the cryptocurrency market is experiencing a slowdown in exchange activity. The 7-day moving average for Bitcoin’s exchange volume has dropped by 41.9% since January 23rd, going from $31 billion to $18 billion. Ethereum has fared even worse, with its exchange volume down by 46.7%, from $15 billion to $8 billion.

The entire DeFi ecosystem is likely to be affected by this dramatic decline in trading activity in both major cryptocurrencies.

As it is trading volume that mainly drives liquidity in anything, the current CEXs and DEXs trading landscape makes for an untenable liquidity crisis in these two primary assets. If not for liquidity provision from the top two tokens and the DeFi protocols that them rely on, there is no secure DeFi.

The recent CEXs trading stagnation also has a lot to do with traders moving to slightly more stable options in response to a very heightened atmosphere of market uncertainty.

External macroeconomic factors have added another layer of complexity to the situation. Traders and investors are reacting to news of escalating economic tensions, and the former U.S. president’s tariff stance is giving even more uncertainty to the markets.

Uncertainty at this level can impact all the asset classes we normally deal with, from plain cryptocurrencies to traditional equities.

Investor anxiety is definitely up, for a number of reasons. Overall, fear is making many in the space more cautious, especially in engaging with the DeFi protocols.

One of the most disquieting aspects of this downturn is the drying up of liquidity. For DeFi protocols to do their work properly, they need healthy liquidity pools, and right now, those pools are in trouble. ADEX volumes are plummeting; consequently, so are liquidity pools. Slippage is up; more important, trading opportunities are down. And when trading becomes less attractive, you can be sure that whatever price DeFi protocols are spitting out will be that much more volatile.

Furthermore, many DeFi protocols are constructed with the assumption that liquidity will exist at a level that is high enough to support a diverse assortment of assets and trading pairs. When wealth is concentrated in so few assets as it is now, the liquidity simply is not there for all the kinds of trading required to keep DeFi functioning as it was designed to function. And that is before one takes into consideration the concentrated liquidity that exists in just the few stablecoins that have survived the last few months.

We still do not know if this trend will continue. However, if current conditions persist, we could very well consolidate the DeFi space further. We could see this with less established DeFi platforms, which might struggle to survive in a hostile market. Meanwhile, decentralized exchanges like Uniswap and PancakeSwap might find it difficult to regain the activity levels they were enjoying before. Of course, all of this is happening against a backdrop of a very uncertain cryptocurrency market.

This week’s reduction in DEX trading volumes, especially PancakeSwap’s pronounced 33.40% reduction, highlights the DeFi sector’s ongoing downturn. Uncertainty plagues the DeFi industry, resulting in lower trading volumes and diminished liquidity, all of which are creating a tough environment for DEXs. No bear market can last forever, but as the DeFi total value locked (TVL) shrinks with the price of Bitcoin and Ethereum going down, it seems abundantly clear that DEXs are not bear market-resistant.

The decentralized exchanges rely on liquidity to keep functioning, and the current drought is dangerous. It threatens to make many of our favorite DeFi projects unsustainable. This could be a simple case of traders and liquidity providers pulling back. Or it could signal a trend where liquidity is pulled from DeFi altogether in favor of, say, off-ramps to centralized exchanges. Traders will certainly be watching closely for any signs of recovery.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

Follow us on Twitter @themerklehash to stay updated with the latest Crypto, NFT, AI, Cybersecurity, and Metaverse news!

The post DeFi and DEXs Struggling Amid Market Uncertainty: PancakeSwap Takes the Hardest Hit appeared first on The Merkle News.