Even compared to the rest of the crypto market, the explosion in popularity of DeFi has been one of the biggest revelations over the last year. So much innovation and revolutionary new ways to apply blockchain have led to DeFi increasing its total value to incredible levels. Since last May the Total Value Locked (TVL) in DeFi has increased from $1.5 billion to an incredible $63 billion on just the Ethereum Chain. The size of the ecosystem increases by another $22 billion when you include BSC. But DeFi still has massive potential to grow.
The popularity of crypto is based on the ability to store value and hold wealth without reliance on a centralized bank but DeFi can take crypto to the next level. It offers a myriad of other banking services and further increases investor’s options in the decentralized world. DeFi facilitates investors to contribute directly to a decentralized ecosystem and earn interest, rather than having their capital invested at the discretion of a bank. It is this earning of interest and the ability to freely trade that gives DeFi its huge potential.
The Beginning of The DEX
The evolution of decentralized exchanges (DEXes) has been crucial to the rise in popularity of DeFi. All the processes offered by DeFi, such as trading and staking of tokens, are facilitated by a DEX. It is the DEX that has brought crypto away from the centralized exchange and created the entire decentralized ecosystem.
It was in the early days of 2014 that the idea of creating a DEX first entered the minds of the crypto developers such as those at NXT. These first-generation DEXes held assets during a trade in the control of a third party by an escrow process. When the two traders had both submitted their part of the transaction, the third party would release the asset from the escrow to each trader. This was obviously a very primitive system as a trusted third party is required. The reliance on a third party completely negates the philosophy of decentralization.
Ethereum And The Next Generation
However, 2015 saw the launch of Ethereum and everything changed in crypto. A whole new set of tools, most notably smart contracts, were made available for developers by Ethereum. It was smart contracts that allowed the creation of the next generation of decentralized exchanges. Instead of relying on a third party, users could deposit tokens into a smart contract which would release them to the other trader once conditions on both sides of the trade had been met. This removed any need for a third party making this new model truly decentralized.
There were still issues with this solution, however. The system was trustless but not very efficient. Completing a trade could take some time and while the funds are in the smart contract they are not always readily accessible. If a trader needed them quickly for another opportunity they may not be available in a short enough time.
The AMM Brings DeFi Into The Light
The last year has seen a new model become the DEX of choice in the decentralized ecosystem. Automated Market Makers (AMM) are a faster alternative to previous models as they remove the counterparty from a trade. Traders instead trade directly with a liquidity pool where tokens from both sides of the trade are stored and can be purchased. As an example, if a trader wanted to trade BNB for USDT they would send BNB into a pool that contains both tokens. The user would then receive USDT in return. The pool is controlled by an algorithm that will determine the price in such a way that the pool will remain balanced and both sides will always be worth the same.
What is especially significant about the rise of the AMM is that investors are now able to represent the bank. Liquidity pools can be funded by anyone in the crypto sphere inputting tokens of equal value to represent both sides of the trade. The tokens are locked into the pool for other traders to trade against. Users can earn benefits and interest based on the amount of capital invested and the number of trades that occur within the pool. This has changed the landscape of crypto, now users have the ability to earn returns on their crypto and can put their tokens to work. This essential point is what has led to the explosion in DeFi.
The Next Step Forward For The AMM
Uniswap, SushiSwap, and PancakeSwap quickly established themselves as the primary AMM DEXes for the new crypto revolution. Across Ethereum and BSC, DeFi began to thrive. But DeFi is only beginning. New DEXes are being launched looking to optimize and improve upon the already successful AMM model. One of these is CoinSwap Space. CoinSwap has all the features of PancakeSwap, including staking and adding to liquidity pools, but delivers these features at a lower fee and with a greater user experience.
A portion of CoinSwap’s native CSS tokens is burnt every time a transaction takes place similar to PancakeSwap’s CAKE token. This means that the more usage an exchange sees, the more the price of the token can rise. However, CSS token has the benefit of a hard cap of just 19,999,999 whereas CAKE has no hard cap at all. This means that its supply decreases as the DEX is used, further increasing its price.
CoinSwap’s commitment to making DeFi easier and cheaper also extends to the suite of tools they offer their users. Staking and harvesting all of the user's investment across all of their separate liquidity pools is possible in one transaction thanks to these tools. This saves approximately 50% on CoinSwap’s already low fees. CoinSwap also intends to develop away from BSC and onto other chains to become a cross-chain DEX. These developments will keep pushing the boundaries and broadening the scope of DeFi.
Polkadex, another new DEX built on Polkadot, has a Fluid Switch Protocol (FSP) that represents another leap forward for the AMM. A hybrid DEX, Polkadex combines an AMM liquidity pool with an order book. This allows users to trade directly with one another, while also having underlying liquidity that ensures speed and trade availability. Notably, this also allows users to trade in a decentralized way without the fear of being front-run.
DeFi looks certain to develop into a cross-chain ecosystem. More blockchains are coming online that facilitate DeFi processes and it is important that the AMM model can evolve to service these new chains. The newest DEXes on the market are showing that AMM can indeed evolve and will likely be the foundation of DeFi for years to come.