The rise of Decentralised Exchanges

The year of 2020 marked an amazing change within the crypto exchange ecosystem. The rise of decentralised exchanges (DEXs), mirrored the rise of the Decentralised Finance (De-Fi) Industry itself.

By offering benefits of anonymity, ease-of-use, deep liquidity and composability, pioneering DEXs established themselves during 2020 and look set for wider adoption during 2021. The disruptive nature of DEXs may well pose a challenge to Centralised Exchanges (CEXs).

For CyberTrade, a company offering automated trading services, it is essential to understand the DEX ecosystem and its ramifications for crypto trading.

Decentralised Exchanges and De-Fi

During 2020 a clutch of DEXs emerged. Not only did they establish themselves in a competitive exchange market, they also became an integral part of the emerging Decentralised Finance (De-Fi) industry.

Notably, the decentralised exchange Uniswap, created a special role for itself in becoming the 'birth place' for new ERC20 tokens. On Uniswap, multiple new ERC 20 tokens launch every day, facilitated by associated liquidity pools. There are now third party tools available to track new token launches on Uniswap, the first signs of a Uniswap 'ecosystem'. This is a remarkable achievement because it means that a decentralised exchange is now the route to market for the overwhelming number of new ERC20 tokens. Crypto projects are no longer subject to the whims and financial motives of centralised exchanges, for initial listing purposes. A huge step forward in democracy for the crypto world.

Restoring the Decentralised model

The DEXs showed that it was not, after-all, necessary to 'pollute' the Distributed Ledger Technology (DLT) world with centralised exchanges. DEXs proved that it was possible for to stay true to the ethos of decentralisation while securely exchanging cryptocurrency and respecting privacy.

By carefully separating out the 'crypto currency exchange' (aka 'Swap') element from the familiar (centralised) 'trading platform', DEXs have circumvented the need for 'super fast acting' centralised trading exchanges. DEXs have proved that traders are content with 'blockchain speed' when simply exchanging crypto.

From the CyberTrade point of view, DEXs do provide sufficient speed and volume to enable automated trading services to enter and exit from trading positions.

Decentralised exchanges are on the rise!

Generally speaking, knowledgeable crypto investors/traders have realised that the decentralised exchanges offer a superior customer experience and (in some cases) superior functionality. The characteristics that deliver that superiority are:-

DEX Characteristics:
  • Anonymity - Users are not subject to the inconvenience and hassle (ID and intrusive background checks) associated with centralised exchanges.
  • Intuitive - Users simply step up to a DEX, then use a point-and-click to exchange crypto (No complicated 'trading' user interface to master)
  • Non-Custodial - DEXs do not take custody of crypto assets, thereby reducing/eliminating the chance of exchange hack or asset seizure.
  • No-Counterparty required - Many DEX have moved away from 'order book' market making and to Automated Market Making via liquidity pools.
  • Deep Global Liquidity - DEX are less 'geographic' than CEX and manage to maintain good liquidity, on a global scale.
  • Low Exchange Fees - DEX generally have very low exchange fees, enabling traders to retain more of their trading profits.

DEX Leaders

As we move through 2021, many more DEXs are appearing. Currently the leading DEXs are :-

  • Uniswap - Liquidity pool based exchange facilitating swaps/flash swaps. Integrates with DApps and is a launchpad for new ERC20 tokens.
  • dYdX - Seamless Spot market exchange, long/short with (permissionless) leverage, also provides interest while assets are within a trade.
  • Kyber Swap - Liquidity pool based exchange. Liquidity for a wide range of exchange pairs. Open and effective governance model.
  • 1inch - A DEX aggregator, offering limited slippage on large orders. Provides limit orders and lending features.
  • Balancer - Liquidity pool based exchange, featuring both public and private pools, as well as customisable pools for specific purposes.
  • Airswap - High liquidity DEX, with Zero trading fees for the supported assets.

Generally speaking, the trend of increasing DEX connectivity, via 'smart order routing' and 'aggregation' will continue to drive DEX competitiveness via best possible pricing with minimal slippage.

During 2021, the DEX leaders will be joined by many innovative new-comers as the De-Fi ecosystem continues its explosive rate of expansion.

Overall, DEXs are expected to attract more customers and significantly increase trading volume and market share.

CyberTrade researches DEX developments, both to understand the innovative trading instruments being invented and also to know how to harness the 'composability' of such instruments to produce new automated trading services. Ultimately, CyberTrade will implement the new trading instruments within De-Fi recipes (aka Money Lego) to provide novel automated trading services.