A Look Into Layer 2 DEXs - Will ZKSwap Stand Out?by@zkbase

A Look Into Layer 2 DEXs - Will ZKSwap Stand Out?

by ZKBaseJuly 31st, 2021
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A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. In contrast to centralized exchanges (CEX), DEX platforms are non-custodial, meaning a user remains in control of their private keys when transacting on a DEX platform. More DEXs are turning to Layer 2 solutions, such as Optimistic Rollups, ZK-rollups and Sidechains, to tackle scalability issues.

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DEX Is Booming

A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. In contrast to centralized exchanges (CEXs), decentralized platforms are non-custodial, meaning a user remains in control of their private keys when transacting on a DEX platform.

According to research group Messari, in Q1 2021, decentralized exchange (DEX) volumes went parabolic reaching over $217 billion, up 236% from Q4 2020, and a whopping 8,012% from Q1 2020. Data by Coingecko also shows that there are over 100 decentralized exchanges as of June 2021. It’s of no doubt that DEX is booming.

More DEXs Are Turning To Layer 2 Solutions

Layer 1 blockchains such as Bitcoin and Ethereum form the foundation of most of the crypto world. They typically consist of older (1st or 2nd generation) blockchain protocols and usually use the Proof-of-Work mechanism, which requires miners to solve mathematical puzzles to generate blocks (hashing). For Layer 1 blockchains that have a large mining community, the cost of attack is usually very high, making the protocol very secure. The tradeoff, however, is that this is computationally expensive, energy inefficient, and slow. This cost is passed down to the users of the protocols, which eventually leads to extremely high network gas fees in widely used protocols, such as Ethereum. This is why DEXs seek to use Layer 2 solutions.

A Comparison Between Layer 2 Solutions Designed to tackle scalability issues, Layer 2 solutions are secondary frameworks or protocols built atop of this base layer that can function independently while remaining anchored to the security of the main Layer 1 chain. Layer 2 solutions use various techniques to connect to the Layer 1 chains, including Optimistic Rollups, ZK-rollups and Sidechains. Each solution is implemented differently, and this has implications in terms of performance, security, and decentralization.

Apart from the above DEXs, many other DEXs like Synthetix (Optimistic Rollups), Compound (Optimistic Rollups), and Bancor (Arbitrum) are also using or planning to adopt Layer 2 solutions as AMM and liquidity mining become increasingly popular. The competition for these projects only becomes fiercer each day.

For DEX users, ZKSwap may be their first choice due to 0 fees for trading and transfers. Besides, in the V2 testnet launched on June 23, ZKSwap has brought users more exciting features, allowing users to list unlimited tokens, customize transaction fees, search a token by its contract address, hide Layer 2 assets in a small amount, read risk notification of newly-added tokens, etc.

In the 2.0 version, the ZKSwap team aims to solve problems like slow withdrawal time from Layer 2 to Layer 1, poor scalability, etc. by changing the token management strategy and optimizing the circuit as well as the withdrawal procedure. The reason why V1 faced those problems is that the team chose to use the most promising yet the most difficult Layer 2 solution – ZK-Rollups. It would be much easier if the team had chosen other solutions. Despite all that, there has been tremendous project development since the debut of ZKSwap V1 mainnet on February 14, 2021. During the past 5 months, the mainnet was updated six times to improve product performance and user experience. The V2 mainnet will go live and be deployed on BSC, HECO, and OKEx Chain once the testnet runs steadily.

At present, listing a token on Uniswap or Sushiswap requires users to have 50% of the total liquidity value of the token in ETH or USDT. For example, to list a token with $1 million liquidity value, users have to prepare $500,000 to ensure a good liquidity, which may be harsh terms for early projects. Compared with other ZK-Rollups-based layer 2 DEXs, ZKSwap has an easy-to-use interface for the Free Unlimited Token Listing feature. All users have to pay is the Ethereum gas fee when creating an ERC-20 token. Such a design will eventually benefit all participants in the DeFi ecosystem, attracting more projects to use Ethereum for blockchain development, token listing, airdrops, etc. Meanwhile, the whole blockchain and cryptocurrency community will grow as it becomes much more easier and cheaper to launch one’s dream project or token.

In celebration of the V2 Testnet Launch, the ZKSwap team invites all community members to join two user experience programs, i.e., Try V2 Testnet & Try Unlimited Token Listing, which offer a 28,000 prize pool to reward valuable suggestions or feedback. From June 23rd to July 6th, users can try all of the new features on the testnet, give feedback on the ZKSwap forum, and get a chance to win up to 400 ZKS if they participate in both campaigns.

For users who want to try this Free Unlimited Token Listing feature, there is also a tutorial published on ZKSwap Wiki. According to the tutorial, it only takes about four steps to list a token on ZKSwap – Enter the contract address, confirm token details, select a fee token to create a token pair, and confirm all details again. And wait for five to ten minutes before it is added to ZKSwap.

For the moment, ZKSwap only supports ERC20 token listing, meaning users have to create a test token on Ethereum’s Ropsten network if they want to try V2. After the testnet runs smoothly, ZKSwap will launch its V2 mainnet and support unlimited tokens and token pairs of all standards on both APP and WEB versions.

Since the ZK-Rollups upgrade in March, 2021, ZKSwap has seen rapid development in various aspects. By the time of writing (June 23), the total layer 2 accounts on ZKSwap are nearly 90,000, its historical trading volume over $11 billion, and swap volume more than $2.3 billion. The star DEX’s peak TVL once surpassed $2 billion. That’s about 80% of the DEX market share, citing data by Layer 2 Beat. While Ethereum remains congested and more projects switch from Layer 1 to Layer 2, tech innovation plays a vital role in DEX competition. With the successful launch of the ZKSwap V2 testnet, ZKSwap may extend their success of innovative technology, leading the development of the DEX field.