Decentralized Exchanges and the protocols that they are built upon have seen huge strides being made in the last couple of years. A lot of issues that a general purpose blockchain use-case faces like scalability, slow-adoption, volatility and whatnot are gradually fading away.
Most of these problems stem from the fact that a large number of claiming-to-be “Decentralized” exchanges were either hidden behind centralized back-end systems (Read ShapeShift) or were just a promise of being “decentralized” in future (Read: KuCoin and Binance). However, things have gotten a lot better when it comes to decentralized exchanges in recent times.
We at Sodio Technologies have been working on decentralized exchanges, which are inherently free from issues that the early decentralized exchanges were facing. These included Front-Running, low liquidity and transaction volumes as discussed here on our tech blog.
Having worked on the DEX ecosystem for such a long period, and spent hours of research and experimentation on how they can be made better, this is my attempt to help people in cryptosphere visualize what decentralized exchanges of future look like.
Cross-Chain swaps and Plasma
One of the most dire disadvantages that the decentralized cryptocurrency exchanges have had until now is the restriction of trades on a single blockchain. And surprisingly, almost all of the most promising DEXs and protocols about to be launched are looking to solve this problem. Neo smart contracts are a classic example to create such applications as Neo inherently supports atomic swaps across different blockchains.
Although there are present limitations(mostly at the cryptography level) with other chains we can expect to see more and more atomic swaps coming in to the scene of decentralised trading as the technology matures.
One more market ready solution to roll out faster DEXs is the Plasma Protocol wherein the performance of DEXs can be enhanced to match throughput of a centralised exchange, while simultaneously ensuring safety of assets by using a hierarchical state channel approach towards the rootchain, dApps & sidechains along with an extra implementation of zero knowledge proofs (L2 scaling)
Another related concept, Atomic Swaps have gained considerable traction in the recent times. While it’s still under development, a number of applications on the lines of Atomic Swap have risen. As to what it means, in case you don’t know already, Atomic Swap is termed as exchange of cryptocurrency A for Cryptocurrency B without any centralized/custodian intermediaries being involved.
It takes place directly between blockchains of the two currencies, or even at the wallet level. No dependence whatsoever on a third party or an escrow manager along with zero risk of any participant defaulting on the trade is what makes the idea of Atomic Swaps promising.
Even in case of the newer Ethereum DEXs, ERC20 and other non fungible ERC tokens are atomically swapped on the Ethereum blockchain for other tokens or WETH (Wrapped Ether), since ETH does not support atomic swaps for Ether ~ ERC tokens, enabling a true peer to peer trading experience at the wallet and on-chain level.
0x Protocol for Ethereum DEXs
Almost everyone knows by now the impact that the 0X protocol has over the peer-to-peer exchange of ERC20 tokens on the Ethereum Blockchain. Not only this, the team at 0X claims to solve one of the most infamous issues about the dApps — interoperability.
One notable advantage that the 0X protocol provides for almost all sorts of decentralized applications that incorporate exchange functionality is the access to liquidity pools over the network.
The relayer with one of the largest trading volume built upon 0X project is Radar Relay. In it’s early days, they chose not to implement fees. Also, the price at which the immediate last trade was made is by default entered as the price when you make a new order in the Radar relay. Radar relay is essentially a P2P Trading platform for the ethereum based tokens built over the 0X protocol.
Eliminating Front-Running completely
Front-running, which has already been a drat pain for traders even in the old times of stock markets, continues to be a real problem for a number of honest traders in the centralized Cryptocurrency exchanges.
However, the rise of decentralized crypto exchanges saw big claims of eradicating front-running completely from exchanges and protocols like AirSwap and ShapeShift. But the full-scale application of their methods is going to take time and patience, which clearly the cryptosphere doesn’t have to spare.
As discussed in this article, front-running stems from two cases:
The most obvious solution that strikes the mind of a person is concealing the “transaction” amounts of the orders. However, since many bad players are present in the cryptosphere, concealing the transaction amounts or the bid amounts in a buy or sell order can prove out to be direly counterproductive. Because how can we ensure that a trader actually pays the amount at which she won the bid.
However, another way of eliminating front-running completely is on the very lines of concealing the transaction amounts since it is about concealing the fact that transaction is taking place in the first place. This will be done by using k-anonymity. In k-anonymity, superficial and virtual data points (transaction details in this case) are added with the data point that you want to conceal (the transaction details of an user in this case) such that it is nearly impossible for the bad actors to front-run that buy or sell order. While still managing to get it through with the smart contracts.
The DEX we have made!
In our White labelled DEX Solution, which I believe stands a darn good chance to improve the trading experience for a lot of our fellow cryptosphere habitants, there are a lot of unique features.
One of the best features that I personally love is the provision for order matching in all the decentralized exchanges that’ll be connected under our relayer. This helps DEX owners to reap benefits of having a bigger liquidity pool from multiple decentralized exchanges irrespective of individual volumes. Obviously, it’s the discretion of individual DEX operators whether or not to opt-in for the shared liquidity pool.
Apart from all this, the DEXs are equipped for the users to collaborate with the DEX owners to launch an ICO , token creation as well as list their tokens post ICO with them in a very seamless and hassle-free manner. Which by the way, is an excellent revenue-generation option for the DEX owners and obviously for the users as launching an ICO/listing their token has never been easier & cheaper.
These are the things that I wanted to share about the advancements in the decentralized exchange. It is based on the insights from our team which we gathered as we worked upon the development of a number of cryptocurrency exchanges.
Also, asking all the readers for suggestions, comments and thoughts on what they think could the future DEXs look like or should have goes without saying.
If you liked this, don’t hold back them claps. Everyone loves them.