Now that the bull market has come, the development of DEX may have been more than just a bull market booster. With the support of the blockchain industry and the driving force of the entire decentralized Internet, decentralized exchanges (DEX) have developed rapidly. Back in 2020, the development of DeFi has changed the development trend of the industry. Uniswap launched the V2 version, and DEX aggregators such as 1inch Exchange, SushiSwap, PancakeSwap, Bancor v2, etc. were released. This is the evolution of DEX as we know it today.
The competition between DEX and CEX is not only about technology, but also about economic model and high-performance competition. Compared with CEX, DEX has obvious security advantages and can greatly reduce various risks caused by human factors. However, the current performance of the underlying public chain severely restricts the development of DEX, resulting in a user experience far lower than CEX.
Due to the limitations of blockchain infrastructure, DEX is not yet an opponent of centralized exchanges in many aspects. According to the data, the transaction volume of decentralized exchanges accounts for approximately 1-4% of the total transaction volume. As of March 2021, the total transaction volume of the top 10 DEX is significantly lower than that of the top 10 CEX, with ratios of US$0.104 trillion and US$1.44 trillion respectively.
However, DEX has had a huge impact on the development of blockchain and the decentralized Internet. There are four main points:
1. DEX liquidity empowers DeFi development
The growing demand for DEX is triggered by providing users with a level of security and privacy. The integration of the entire DeFi industry is also deeper and the assets provided are more diversified.
CEX imposes control on cryptocurrencies that have been online, usually to avoid legal or security issues and ensure maximum profitability; while listing on DEX depends entirely on its community, any user or project can create a fund pool and provide liquidity Sex started trading. Therefore, many altcoins and tokens with small market value can only be obtained through DEX.
For many cryptocurrency traders, DEX is the only opportunity to enter altcoins and be able to find promising projects for early investment. For the DeFi platform, DEX is the only channel to the audience.
Listing on DEX can provide motivation for early-stage projects, and the project team uses the DEX liquidity pool as an incentive method. The liquidity in the liquidity pool also reflects investor signals, and they can close their positions and sell them at any time. The liquidity accumulated on DEX is still a small part of the amount that CEX can provide, but the funds are more flexible.
2. Farming income based on DEX
DEX is one of the main components of DeFi, and Uniswap alone supports more than 200 DeFi trading pairs. DEX native tokens account for half of the market value of the DeFi ecosystem, and revenue aggregators are also mainly based on DEX.
Farming income is through the user injecting liquidity into the DEX fund pool, and then pledge LP tokens in the farm to earn their native tokens, and at the same time receive transaction fees.
Liquidity mining is not limited to DEX. Some aggregators such as Beefy Finance support a single fund pool and use loan agreements to mine more original tokens. Another option is to proceed on a loan agreement, where the platform provides liquidity distribution incentives for its pools.
Before the launch of liquid mining projects, these agreements were already in operation and well known. Liquid mining based on Uniswap, Curve and other platforms made farming income easier.
DEX aggregates multiple functions. For example, SushiSwap released its lending platform Kashi for margin trading, PancakeSwap released its NFT, and 1inch launched its farming plan.
As the DEX platform more and more meets the needs of traders, the network has become congested, and the heavy load of the Ethereum network highlights its shortcomings, prompting the development team to use new features to propose updated and scalable solutions, and DEX has created more practices Case.
At the beginning of 2021, DEX trading volume set a new record. In the high demand and high load of the network, the Ethereum Gas fee has risen by nearly 400%.
The issues of scalability and high transaction fees are not new to the network. But this time, it promoted the development of alternatives to Ethereum, such as layer 2 solutions and the Binance smart chain, mainly PancakeSwap. PancakeSwap now processes more than 2 million transactions per day, which is more than the entire Ethereum network.
In response to competing blockchains eroding Ethereum’s market share, the Ethereum development team has launched a second-tier expansion plan. The team is working on the promotion of Optimism, ZK, xDAI and Polygon. And here it comes down to DEX. Uniswap and Synthetix have announced that their agreement will integrate Optimism solutions. Market participants said that many DeFi projects will also choose Optimism instead of other rollup solutions, just to maintain integration with large projects and their liquidity.
4. DEX competition promotes industry development
Uniswap still occupies half of the DEX, accounting for more than 30% of the total transaction volume. But in order to stay in the top 10 and compete with other network platforms and solutions, a lot of optimization and improvement are needed.
In terms of design, all DEXs have achieved the same function, realizing the P2P exchange of tokens. However, in terms of strategic development, each platform has its own focus and unique functions.
For example: SushiSwap focuses on the expansion of the liquidity pool; Uniswap v3 allows users to deposit funds with a custom price curve by introducing liquidity functions, putting capital efficiency in the first place.
The development of DEX is the motivation to solve the problems related to the entire DeFi industry. The next milestone is the successful launch of a cross-chain DEX to achieve interoperability. The development of DEX is related to the progress of the entire blockchain industry, which has greatly affected the development of the decentralized Internet. DEX contributes to the entire DeFi service ecosystem, including more decentralized applications, decentralized SaaS, and promotes asset tokenization and the adoption of P2P models.
Despite the progress, we are still in the early stages of Web3 development and adoption. Users still encounter many obstacles: it is difficult to interact with the protocol on the mobile terminal of the mobile phone, and the PC version requires additional software support. At the same time, there are issues such as scalability, operating costs, user experience, and security. But this is very common for emerging technologies and mechanisms, especially those that bring economic and financial value.
DEX is still an emerging concept, so their technology still needs to be developed. Although their goal is to serve a specific purpose, they are not attractive to most cryptocurrency traders because they cannot solve most of their needs. In the long run, DEX is likely to become more advantageous, but for now, they just lack some of the characteristics that make centralized exchanges popular, such as liquidity, use of a series of cryptocurrency tools, leverage, and fluency User experience.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.