In the wake of the FTX meltdown, the broader crypto market has seen the development of a number of important new trends. Arguably the most important new trend is the shift away from centralized exchanges such as FTX and toward decentralized exchanges, all in the name of mitigating potential risk. 

And that’s why I think Uniswap (UNI 2.65%) is an even better investment now than it was in 2022 before the FTX debacle. You might say that Uniswap is on the right side of history here, because Uniswap is the largest decentralized exchange in the world. 

So if investors are moving away from centralized exchanges to decentralized exchanges, shouldn’t Uniswap be one of the biggest beneficiaries?

Trader with laptop on Wall Street.

Image source: Getty Images.

Why are decentralized exchanges gaining favor?

To understand why decentralized exchanges are becoming more appealing to investors, it’s important to understand some of the biggest differences between centralized exchanges and decentralized exchanges. With a decentralized exchange, investors can buy and sell cryptos without the need for brokers or other third-party intermediaries. Instead, they are swapping cryptocurrencies with other investors on the exchange in a form of peer-to-peer trading.

Users also do not need to set up an account, as they would in the case of working with FTX or Coinbase (COIN 8.59%), so they never have to trust the exchange to look after their funds. All they need to do is connect their personal blockchain wallet to the decentralized exchange and find the right currency trading pair, and smart contracts take care of the rest.

From the standpoint of individual investors, these features of decentralized exchanges create three enormous advantages. For one, there’s the whole trust issue. You don’t have to worry about someone like Sam Bankman-Fried in the Bahamas making off with your crypto, because your crypto is always within your crypto wallet.

Secondly, you can theoretically get better prices for your crypto because there is no intermediary involved to take a cut in the form of fees on the transaction. 

Finally, investors can gain access to a much broader palette of potential cryptos to trade than on centralized exchanges. Uniswap, for example, offers trading in 839 different coins compared with about 150 on Coinbase.

New market opportunities

Currently, Uniswap is the No. 1 decentralized exchange in the world. Average daily trading volume is nearly $1 billion, which is nearly five times that of its next nearest rival. 

Moreover, Uniswap specializes in trading altcoins minted on the Ethereum (ETH 0.75%) blockchain, so one way of thinking about Uniswap is that it is an unofficial cryptocurrency exchange for Ethereum. You can immediately grasp why that makes Uniswap so valuable, given that Ethereum has a huge market cap of $163 billion and is the second-largest crypto. On some days, there is more Ethereum traded on Uniswap than on Coinbase.

But that’s just the beginning of what’s possible with Uniswap. In October 2022, Uniswap Labs received a fresh $165 million venture capital infusion to fund new initiatives, all of which are designed to attract more users to crypto and decentralized finance

And one big initiative that has been much talked about is expansion into the trading of all digital assets. Uniswap is starting off by getting into the non-fungible token (NFT) trading business, and from there, could branch out into just about any tradable digital asset.

So what’s not to like about Uniswap?

Given all this, Uniswap might sound like a slam-dunk investment. However, there are a few caveats.

The first, of course, is that Uniswap is a player in a very competitive marketplace in which it must clearly delineate its pros and cons to investors. It might be the No. 1 decentralized exchange, but it is still smaller than centralized rivals such as Coinbase.

When considering how to invest in crypto, most investors, think first and foremost about these large centralized exchanges. After all, these are the types of exchanges that advertise on TV and pull in the big-name celebrity sponsors. Moreover, there are plenty of other decentralized exchanges that are trying to catch-up, so it’s not like Uniswap has a monopoly.

Moreover, Uniswap faces the same type of market issues that a centralized exchange like Coinbase does. Coinbase is struggling to bring in new retail investors and boost trading volume, a huge challenge in the depths of the current crypto winter. The less people trade, the less money an exchange makes.

Thus, it might be difficult to make the case for Uniswap, which is also dependent on trading volume for its success. That might explain why Uniswap trades at only about $5.70, nearly 90% below its all-time high of $44.97.

Investing in Uniswap is all about investing in the future of the crypto market. So, how you feel about the current health of the crypto market will markedly influence how you feel about Uniswap.

That said, I’m confident about a near-term turnaround in the crypto market, so I’m also bullish on Uniswap over both the short and long term.

Dominic Basulto has positions in Ethereum. The Motley Fool has positions in and recommends Coinbase Global, Ethereum, and Uniswap Protocol Token. The Motley Fool has a disclosure policy.