Decentralized exchanges (DEXs) have seen tremendous growth. But they haven’t been adopted at the same level as centralized exchanges. Here’s how to fix that so we can all access the permissionlessness, and censorship resistance that DEXs can provide, says Chad Barraford, Technical Lead at THORChain.
Decentralized exchanges: An alternative
The multi-trillion dollar global financial industry has been facing the heat – inflation, corruption, rising interest rates and threats of recession across major economies have left citizens frustrated with the status quo. The current state of affairs has left many people searching for a fairer alternative, where their voice matters. A place that values the individual over the institution.
Decentralized Finance (DeFi) provides that alternative. It is a financial system that cuts out costly intermediaries and democratizes access to the financial system for the benefit of billions of citizens across the globe. In fact, according to Emergen Research, the global DeFi market is expected to reach over half a trillion dollars by 2028. This explosion of the DeFi industry has also led to the formation of one of its many innovations – Decentralized Exchanges (DEXs).
Since their inception in 2014, DEXs have grown to handle over $1 trillion in trading volume in 2021. User autonomy is one key pillar underlying this growth, as demonstrated by recent operational decisions by centralized platforms. On a DEX, users exercise far more control over their assets. And, they are less likely to encounter issues of suspended or halted servicing. In addition, the decentralized nature of DEXs provide users with greater security by having no single point of failure, versus a centralized exchange (CEX) that can be a more vulnerable target for exploitation.
Despite their tremendous growth to date, engagement with DEXs has yet to reach the levels of adoption, as seen with their centralized counterparts. Their complexity and lack of user-friendliness have stymied adoption for the less tech-savvy. In addition, DEXs often contend with limited liquidity, which is heavily dependent on the number of users actively trading on the platform, unlike CEXs.
Decentralized exchanges: evolution
Solving these issues requires a multifaceted approach. One overlooked solution could be DEX aggregators. DEX aggregators can go a long way in alleviating these issues. They offer a real-world solution by amalgamating data from multiple exchanges to serve up the best possible prices for users. This is while simultaneously enhancing liquidity.
Traditional finance has failed to include as many as 1.7 billion people, who remain unbanked and marginalized primarily in emerging economies. DeFi and DEXs offer a new monetary track for addressing these issues. This is while enabling anyone to access financial products using decentralized infrastructure, with nothing but a smartphone connected to the internet.
By acting on the notion of democratizing finance, DEXs can open up a world of opportunities for millions. They can unlock access to financial services like borrowing, lending, and payments.
Organizing data
DEXs outperform their centralized peers with improved transaction management, lower barriers to entry and increased sovereignty over assets. Building on the non-custodial benefits of any given DEX, data aggregation provides a bonus layer of utility for the individual user.
Data grows exponentially, and we need tools to help gather and organize it. Uber doesn’t own a single taxi, Airbnb doesn’t own a single bed, and eBay doesn’t own any of its listed products. Yet each platform is widely used due to its aggregation abilities.
By building on the strengths of their predecessors, DEX aggregators are creating a new avenue for current DEXs to access the assets and liquidity of other DEXs in another ecosystem. This will involve including the layer one assets of previously siloed chains like Bitcoin, DOGE and many more. This is something that has never been achieved prior.
DEX aggregation sets the foundation for a whole host of data management features involving identity and intellectual property on Web3. The dissolution of barriers between siloed, legacy databases and the proliferation of open data will feed into the development of novel marketplaces. They can take advantage of the diminished cost of verification and trust.
Interoperability will lead the way
Interoperability is key to the development of DEX aggregation. Some proposed solutions for communication between different protocols, such as atomic swaps or wrapped tokens, fail to solve the issue of interoperability at its core. Neither are effective at scale. Native cross-chain swaps are an important technical capability that has already demonstrated its capacity to truly enable interoperability at scale.
With no one solution fitting the fragmented standards of inter-blockchain implementations, the evolution of decentralized data aggregation depends on the freedom of data exchange. Complete interoperability on the web is one of the core enablers for aggregators, like Spotify or Netflix. It is often taken for granted. In a web of data abundance, these platforms have built business success around the discovery and commoditization of supply.
There are thousands of long-tail crypto assets and an ever-growing supply of non-fungible assets. Discovery and commoditization enabled by interoperability would unlock opportunities for Web3 consumers to discover and swap between thousands of native assets. This eliminates the need to participate in riskier wrapped assets, or bridges.
With further development and additional liquidity sources, aggregators can also be manipulated to offer an open, permissionless API for Web3 developers. This allows users to leverage the integrated liquidity pools and functionality to enable many novel cross-chain use cases and applications.
The future is bright
DEX aggregation is on the cusp of going mainstream. It offers users the exciting prospect of connecting many DEXs across different blockchain ecosystems. The process of integrating these DEXs is already underway. Once completed, it will mark a major step forward to securing a multichain future for DeFi.
Once these capabilities are in place, the last barriers to the adoption of DEXs will fall and begin to cut away the market share of CEXs. CEXs cannot compete with the accessibility, ease, transparency, speed of innovation, permissionlessness, and censorship resistance that DEXs can provide.
I’m excited to play a role in building this future and help develop a financial system that is accessible to all while empowering liberty and self-sovereignty to man, woman, and child on this planet.
About the Author
Chad Barraford is Technical Lead at THORChain, a non-custodial decentralized liquidity protocol that enables decentralized exchanges (DEXs) and users to seamlessly transfer their digital assets across blockchains.
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