CEX VS DEX: Comparison of Liquidity Depth between Uniswap V3 and Binance

Author: Anastasia Melachrinos

Compiled by: Wu Talk Blockchain

Market depth is a commonly used indicator of liquidity, typically calculated through the order books of cryptocurrency pairs on centralized exchanges (CEX). It provides the quantity of buy and sell orders at varying distances from the mid-price, ranging from 0.1% to 10%.

The chart shows the cumulative buy and sell volumes of ETH-USDT at various levels across the top ten centralized exchanges. Each exchange has its own liquidity characteristics at each point in time, allowing traders to choose the most suitable platform based on their execution strategies.

Overall, greater market depth indicates higher liquidity, making it easier to buy or sell assets close to the expected price. It also helps traders better estimate the slippage that larger orders may incur. Greater market depth corresponds to lower slippage, meaning the market can accommodate larger trades without significantly altering the market price.

Uniswap V3 Market Depth

However, merely observing the liquidity of CEX is not enough; DEX accounts for a significant portion of trading volume for certain tokens. For example, on August 20, Ethereum DEX accounted for 25% of USDC trading volume and over 80% of DAI. However, comparing the liquidity of cryptocurrency markets is quite complex due to the differing price discovery mechanisms between DEX and CEX.

Most DEX do not use order books but instead utilize automated market makers (AMM). AMM determines asset prices by assessing the quantity of each asset in various liquidity pools at different price levels. These pools acquire tokens from liquidity providers (LP), allowing traders to trade these assets directly. Although most AMM-based DEX do not use order books, certain liquidity pools (like Uniswap V3) particularly rely on what we call concentrated product AMM, which can be modeled as an order book because LPs store tokens within certain price ranges. An example can be seen in the wETH-APE 0.3% fee pool below.

To ensure that all cryptocurrency markets have accessible and comparable liquidity data, Kaiko provides users with all the data and tools needed to compare market depth between CEX and DEX.

Taking a closer look at Uniswap V3 market depth: we calculate it for specific Uniswap V3 pools and blocks according to the α level (percentage relative to the current block price). Using Kaiko's Uniswap V3 liquidity snapshot data, we track liquidity, including the number of tokens available from liquidity providers across initialized different price ranges. We then apply Uniswap V3's equation to determine how many tokens can be swapped before the price changes by 1 + α. The range of α compared to the market price is from -/+0.1% to +20%.

Comparing Uniswap V3 and CEX Market Depth

With this, let's take a look at one of the most liquid cryptocurrency trading pairs, the market depth of (w)ETH-USDT on Binance and Uniswap V3.

The wETH-USDT 0.3% fee pool on Uniswap V3 has less liquidity than Binance at most price levels, with Binance having more than four times the liquidity of Uniswap at certain price levels. However, Uniswap does have more liquidity at certain price levels that are farther from the mid-price. Notably, this is just one of the wETH-USDT pools on Uniswap V3, and there are two other pools with different fee levels; if you combine the liquidity of these pools, their liquidity near the mid-price is slightly lower than Binance, while liquidity further away from the mid-price is higher.

Overall, the liquidity distribution on Uniswap V3 is surprisingly symmetrical, indicating that the liquidity distribution is broad enough to effectively capture most price movements.

Exchange Market Depth Breakdown

Although Uniswap V3 loses to Binance in the liquidity competition for the (w)ETH-USDT pair, it surpasses all major CEX in the (w)ETH-(w)BTC market. For prices within the range of 0% to 6%, the 0.3% and 0.05% fee pools for this trading pair provide 6 times and 3 times the liquidity, respectively.

Given the popularity of wETH and wBTC as base and quote assets on Uniswap, these findings are not surprising. These markets provide efficient paths for trading; for example, exchanging wBTC for a niche coin is likely to occur through this pair. Therefore, it makes sense for liquidity to be concentrated here.

Overall, there are over 13,000 liquidity pools on Uniswap V3. Among them:

● About 1,500 pools use wETH as a base or quote asset, accounting for approximately 11% of the total pool count.

● Over 500 pools include USDC, accounting for about 4.50% of the total.

● About 100 pools include wBTC, accounting for approximately 0.75% of the total pool count.

Surprisingly, for smaller tokens like CRV, Uniswap has lower liquidity compared to the top 5 most liquid CEX providing the CRV-(w)ETH market.

Considering the challenges faced by the CRV token recently, it is expected that the liquidity in these markets would be limited. In March 2023, CRV trading mostly occurred on decentralized exchanges, especially during periods of stress. As the CRV token was used by Curve's founders to collateralize loans on platforms like Aave, CRV holders felt uncertain. Since then, vulnerabilities in certain Curve pools have exacerbated uncertainty, reducing the incentive for users to provide liquidity, potentially absorbing harmful liquidity.

Most Liquid Uniswap V3 Pools

From a broader perspective on Uniswap V3's liquidity, it can be seen that four out of the five most liquid Uniswap V3 pools have a trading fee of 0.05%, which is the second-lowest option on Uniswap. It appears that liquidity providers (LPs) have reached a balanced state, finding that 0.05% offers the best balance between trading volume and fees.

Compared to CEX, Uniswap V3 offers traders a competitive market; with ample liquidity at different price levels, these markets are particularly attractive to arbitrageurs, although trading costs may vary. This standardized market depth dataset for CEX/DEX not only helps us understand the impact of recent market events on liquidity but also reveals the role of market microstructure in shaping liquidity dynamics.