Liquidity Wars: Centralized Forex vs Decentralized Crypto Exchanges

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Efficient entering and leaving trades in any financial market rely on liquidity. In currency and crypto trading, liquidity is important because it distinguishes volatile, less liquid assets from markets where supply and demand are accurately shown.

The rise of decentralized crypto exchanges over the last decade has given people an alternative to trading digital assets with traditional centralized forex brokerages. Those in favor say that decentralized platforms allow for better visibility, greater safety, and more direct access for users.

Nevertheless, those against decentralized exchanges say they do not offer as much liquidity as the famous forex providers, Bloomberg and Refinitiv. This competition over liquidity, particularly with the rise of crypto in FX trading, has consequences for traders, investors, and the future of digital markets.

Forex Market Structure

It’s important to know that the foreign exchange (forex) market is the world’s largest financial market, and in 2022, it typically averaged around $7.5 trillion in daily trading volume. If we look at the top participants, then investment banks, central banks, hedge funds, commercial companies, and retail forex brokers are included.

Currency trading directly between the large banks, the Forex interbank market, does not set its prices. Instead, they are set by the supply and the demand. The major currency pairs include EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The reason is simple — since prices are quoted out to the 5th decimal point, due to extreme liquidity, you can make massive trades with little slippage.

Forex markets are accessed by retail traders through IG, CMC Markets, and Pepperstone, which are all regulated brokers. Although these firms offer online trading platforms, they offset client orders through their liquidity relationships with the tier-1 banks. Individuals can trade on institutional-grade spreads and execution on this model.

Cryptocurrency Market Structure

Since Bitcoin was launched in 2009, the cryptocurrency market has enjoyed rapid growth to such an extent that its total market capitalization reached over $3.38 trillion in 2025. Bitcoin, Ethereum, Tether, USD Coin, and Binance Coin are all top crypto assets.

Back in the days of crypto trading, crypto trading was person-to-person or some janky offshore exchange that was prone to being hacked and being fraudulent. And thus, regulated centralized exchanges like Coinbase, Kraken, and Gemini were formed — custodians and matchmakers between buyers and sellers.

Over the past few years, decentralized exchanges (DEXs) have emerged to allow peer-to-peer crypto swapping without intermediaries. Top DEXs include Uniswap, PancakeSwap, Curve, and dYdX. Users connect wallet addresses to trade directly by relying on automated market maker algorithms rather than order books.

Comparing Liquidity

Liquidity shapes the trading experience through tight spreads, market stability, and scalable order execution. Let’s compare traditional forex brokerages and centralized crypto exchanges to decentralized venues across several metrics:

• Volume. $7.5 trillion, the average daily volume for forex markets, compared to $3.3 trillion.
• Spread Cost. Institutional forex spreads average 0.4 pips on the EUR/USD pair compared to 0.5% for centralized exchanges and 1-5%+ for DEX quotes, depending on asset volatility.
• Market Depth. Top forex pairs boast virtually unlimited depth into the billions of dollars vs. hundreds of millions for crypto markets currently.
• Diversity. Over 50 major, minor, and exotic currency pairs are traded in forex markets compared to BTC, ETH, and a few other liquid major cryptos.
• Trading Protocols. Central limit order books used in forex and centralized crypto exchanges vs. automated market maker algorithms for DEXs.

Although forex brokerages are still king in terms of raw liquidity, centralized crypto exchanges have seen that gap narrow significantly over the last few years as adoption continues to grow. However, DEXs are still plagued with fragmentation and thin order books, which are facilitated by their accessible trading.

Drivers of Liquidity

What factors explain the differences in depth and tightness of spreads between traditional forex and crypto venues? Here are some of the key drivers:

• Underlying Market Size. Cryptocurrency is a drop in the $7.5 trillion daily spot forex market.
• Institutional Participation. Forex liquidity from major banks and hedge funds has only started to allocate to crypto in recent years.
• Trading Incentives. Liquidity mining programs and fee structures are necessary to reward active DEX traders and market makers in order to bootstrap depth in new assets.
• Settlement Finality. Forex trades settle in seconds and are therefore certain, whereas most crypto trades take minutes to confirm on the chain and are therefore uncertain.
• Fragmentation. Thousands of cryptocurrency micro-pairs spread activity across venues, while forex centralizes liquidity among fewer pairs.
• Regulation. Stringent oversight in forex markets encourages participation, while crypto oversight remains uneven across jurisdictions.

For crypto to challenge forex liquidity dominance, institutional and retail adoption need to continue scaling across a range of digital assets. DEX protocols must also evolve to support stablecoin settlement, leverage trading, and market-making.

Market Manipulation Risks

According to several academic studies, liquidity breeds efficiency, but a lack of depth also means there is greater potential for market manipulation. Of course, these dynamics are in play throughout the forex and cryptocurrency markets.

On centralized exchanges, large asset holders potentially have leeway to use size to move prices. Though rare in deep forex pairs, crypto whales have conducted pump and dumps in thin assets. Wash trading between accounts held by a single trader also artificially inflates volumes.

DEXs were supposed to solve these issues through algorithmic protocols. However, exploits like frontrunning, sandwich attacks, and automated arbitrage bots have emerged as threats. If a trader can detect a large order entering Uniswap through the public transaction pool, they may have seconds to place orders first and profit from the subsequent move.

No financial market is fully immune to manipulation. But understanding structural vulnerabilities helps traders mitigate risks. Those new to the crypto space should exercise additional caution when trading on DEXs while the infrastructure continues to mature.

Forex Brokerages Expand Into Crypto

Wall Street looks to grow the crypto economy as institutions search for new profit opportunities. This has pushed the lines between traditional finance and digital asset markets into a gray area.

Several retail forex brokers now allow trading on Bitcoin, Ethereum, Litecoin, and other leading coins in addition to currencies, metals, stocks, and indices. Cryptocurrency CFDs or derivatives are available via Pepperstone, Axi (formerly AxiTrader), and Turnkey Forex, for example. They present exposure without the troubles of owning the actual coins.

Additionally, tier-1 banks like Goldman Sachs and JPMorgan are gearing up to provide crypto services. Goldman extended Ethereum futures and options trading to clients in 2021, while JPMorgan is preparing a managed Bitcoin fund. If the mega-banks that provide interbank forex liquidity enter the fray, expect crypto markets to benefit enormously.

The Future of Decentralized Exchanges

Decentralized exchanges were invented to avoid centralized intermediaries. But can DEXs realistically overtake traditional forex and crypto exchanges, given the liquidity gaps previously highlighted?

Here are several developments that could help DEX protocols bolster volumes and participation in the coming years:

• Cross-Chain Interoperability. Liquidity is fragmented across individual DEXs and is shallow. This consolidates activity connecting siloed networks like Polkadot and Cosmos.
• Leverage and Derivatives. Speculative traders are essential to liquid markets, and products such as leveraged ETH or options attract those traders. These already exist on Synthetix and dYdX.
• Stablecoin Settlement. Tether and USDC settlements would reduce blockchain settlement delays compared to volatile coins.
• Cloud Computing Resources. Projects like Dfinity are testing ways to harness decentralized cloud resources for powering DEX computing needs at scale.
• Institutional Adoption. Growing approval of DeFi protocols by banks and fund managers would be a watershed moment.

As DEX technology advances, it could provide trade services that are as good as or better than those on centralized exchanges. At this point, larger markets for experts and institutions are being provided by centralized exchanges.

Conclusion

Whether a market works or fails often depends on its liquidity. Even though crypto has advanced rapidly, forex markets and exchanges handle much more money every single day.

Although DEXs are gaining ground because of their automated systems, they are not yet used by many traders because of the fragmentation and potential for market manipulation. In the long term, however, the gap between traditional finance and digital assets will likely decrease in the next decade.

If blockchain technology continues to evolve, along with more people using it, decentralized platforms may one day become the main choice for trading forex, crypto, or other assets. Even so, DEXs require more development to be sure about winning the competition for liquidity.

 *This article was paid for. Cryptonomist did not write the article or test the platform.