Since the introduction of the first wave of decentralized cryptocurrency exchanges in 2017 with the launch of the now-defunct EtherDelta and its offshoots, there has been a strong push toward producing a decentralized exchange (DEX) that meets or exceeds the capabilities of popular centralized offerings.
This includes addressing major CEX shortcomings, such as regulatory restrictions, limited asset selection, and potential censorship, as well as matching or exceeding their speed, cost efficiency, and usability.
In the last two years, there have been significant strides made in this area — largely catalyzed by the advent of a new type of DEX known as an ‘automated marker maker’, or AMM. In addition to a wave of innovation in terms of usability, efficiency, and capabilities.
Now, the DEX industry is on the cusp of seeing the first platform to not only equal the capabilities of centralized platforms, but potentially dramatically exceed them. Here’s why.
They’re decentralized… for real this time
Centralized cryptocurrency exchanges suffer from a major problem — they’re not available everywhere. Some countries (e.g. the US and China) are generally restricted due to local government regulations and censorship, while others are simply not supported for one of a variety of other reasons.
Unfortunately, this problem violates one of the key tenets the blockchain space is built on — leveling the playing field. Since CEXs aren’t available to everybody, they fail to help democratize access to crucial financial services, and can easily be shut down or censored at a whim.
This also manifests as security concerns for the end user, since many centralized exchanges have been exploited, leading to loss of user funds since they are considered ‘custodial’ platforms — i.e. users need to give up control of their funds to use them. This isn’t the case with most DEXs.
Early attempts to address this led to the formation of so-called ‘centralized’ decentralized exchanges, which had some features of decentralized exchanges — such as a decentralized order book and non-custodial trading — but also some features of centralized platforms — such as a kill switch and regulatory restrictions. Bancor is one such example.
But this is beginning to change with the advent of truly permissionless, wholly decentralized exchanges that have essentially no failure points. These include Uniswap, which features permissionless trading, liquidity provision, and governance, and can be accessed by anybody irrespective of where they live.
Speed and cost efficiency are about to skyrocket
Right now, the vast majority of popular DEXs are built on the Ethereum blockchain, including Uniswap, SushiSwap, and Curve.
While these are highly capable platforms, they suffer somewhat due to Ethereum’s current limitations. As it stands, the average transaction time is around 13 seconds, whereas the average DEX-associated transaction fee is around $20. This just isn’t good enough to compete with CEXs which can process trades on a millisecond timescale with zero transaction fees.
As it turns out, this problem isn’t enough to dissuade many casual traders from using these platforms, but it can be off putting to high-frequency and professional traders, who can struggle to profitably execute their trading strategies due to the losses associated with transaction delays and high fees.
But that might soon be a thing of the past with the advent of DEXs building on far more efficient blockchains like Polkadot. Take Polkadex Orderbook as an example, the platform is leveraging the unique properties of the Polkadot blockchain to facilitate near-instant trades with almost zero transaction fees.
This could make decentralized exchanges more attractive to high frequency and algorithmic traders who will be able to execute more advanced trading strategies, while also appealing to casual traders who were previously put off by high fees and delays.
Cross-chain Support is Coming
There are currently dozens of independent blockchains, each of which already has, or is developing its own ecosystem of tokens — such as Ethereum, Solana, Fantom, Binance Smart Chain, Cardano, and more.
Until recently, these platforms have all operated independently of one another, leading not only an extreme duplication of efforts — since each platform tends to have its own DEX and extensive range of copycat DApps — but also leading to a problematic experience for users, who were forced to maintain positions for all the chains they wanted to interact with.
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But with the development of new interoperable blockchains like Polkadot, this is expected to become a non-issue very soon. With Polkadot-based decentralized exchange like Polkadex, users will be able to leverage a variety of cross-chain bridges (known as PDEX bridges) to easily perform cross-chain trades — essentially allowing users to source liquidity across multiple chains and gain exposure to practically any asset through a single platform.
Polkadex is also looking to extend this support to the fiat world, by becoming the only decentralized exchange with a decentralized fiat on-ramp. If successful, it could be the first DEX to truly equal the capabilities of centralized exchanges, by being genuinely accessible to everybody — regardless of which platform or currency they wish to use.