Decentralized exchanges (DEXs), which enable users to trade whilst maintaining custody of their funds, have grown in popularity over the years.
Reasons for this include access to lower marketcap coins and being able to trade directly from your wallet. One such exchange is Polkadex.
Polkadex is a decentralized exchange that combines features from centralized exchanges (i.e order books) and decentralized exchanges (token swaps, traders maintaining custody of their funds).
In this post, we’ll be looking at Polkadex and how it works.
Polkadex is a cross-chain, decentralized exchange (DEX) built on Substrate. It enables users to trade tokens on the Polkadex, Ethereum, and Polkadot blockchains.
The platform uses an order book, so users can see a list of buy and sell orders, and it’s a non-custodial, peer-to-peer exchange where users hold the funds in their wallets and trade directly with each other.
Instead of a single protocol, Polkadex is a group of decentralized trading and liquidity tools.
Three main tools make up the Polkadex protocol:
1. Polkadex Orderbook
The Polkadex Orderbook is the main part of the protocol. It’s a Layer 2 exchange built on Polkadot with an order book.
An order book is a list of buy and sell orders, organized by price level. Polkadex implemented this feature for two main reasons:
Traders on traditional, centralized exchanges are used to see different buy and sell orders which are organized by price.
Traders on decentralized exchanges don’t have access to order books.
So this feature was intended to attract users from centralized exchanges whilst providing a feature that was missing from most decentralized exchanges.
The Polkadex Orderbook maintains the convenience of a centralized exchange, whilst being a non-custodial platform, allowing users to maintain custody of their assets whilst trading.
The platform uses a Layer 2 Trusted Execution Environment (TEE) on top of Polkadex.
This system allows an operator to maintain the Orderbook, it also ensures that the operator cannot act maliciously, since the results produced by the TEE contain cryptographic proof.
If any tampering occurs, the blockchain can invalidate the proof which then rejects the tampered state submitted by the operator.
User’s funds are not stored on the exchange since it’s a DEX, instead, the funds are stored in the user's wallets and controlled by the user’s private key.
The Layer 2 side of the protocol is used for placing and executing trades but not transferring any balances. It also ensures that only the trader’s private key can initiate a balance transfer.
Polkapool is a token swap platform and automated market maker (AMM) inspired by Uniswap V2. The platform charges no fees for swapping tokens to eliminate front-running.
Front-running is a process where wealthier traders “cut in line” and get ahead of other traders by choosing to pay higher gas fees.
Front-running is especially troublesome when it comes to first come, first serve token launches.
Traders with a lot of capital can pay higher network fees, enabling their transactions to get through before other traders.
They can then buy as many tokens as they want, causing the token launch to sell out before regular users have a chance to buy any tokens.
Feeless swaps and fast transactions get rid of the front-running issue.
Polkapool also uses Polkadex’s cross-chain bridges to enable interoperability between tokens and liquidity on different networks.
3. Polkadex IDO Platform
PolkaIDO is the Initial DEX Offering (IDO) platform on Polkadex.
Project founders and teams are able to generate tokens, and crowdfund through the IDO process.
IDO projects have access to liquidity through the Polkadex Orderbook and Polkapool.
Projects can only carry out an IDO if token holders have decided to list the project.
Whitelist spots are given out randomly, meaning that users won’t need to hold large sums of tokens to take part in an IDO.
PolkaIDO Launchpad mainly works with Substrate-based tokens and other Polkadot ecosystem projects, but it also works with ERC-20 tokens.
Polkadex’s features include:
Trading Bots & High-Frequency Trading
Users can use high-frequency trading bots on the Polkadex exchange, enabling them to hand over their funds to third parties to conduct their trading activities.
The IDO pallet allows IDO projects to create ERC-20 like tokens with built-in support for parachain transfers and a one-click listing in the Polkadex Orderbook.
Fiat Currency Integration
Fiat currencies are supported in the Polkadex Orderbook, enabling users to buy crypto directly using a credit card.
Traders can use a decentralized KYC (Know Your Customer) system that allows them to store their KYC data on their wallets instead of on the Polkadex platform.
Cross-chain Support for New Tokens
Tokens generated in the Polkadex platform have native support for cross-chain transfers to other parachains and networks connected to the Polkadex ecosystem.
Polkadex has its own native token, PDEX which is used for the following purposes:
Polkadex has a wide range of features and trading tools for investors, who might be drawn towards its CEX-based user interface, trading bot integration and order book.
Others might want to use its IDO platform to get involved with new token launches without having to worry about front-running.