Decentralized exchanges have indelibly changed the way that cryptocurrencies are traded. But in the grand scheme of things, the technology that’s driving these platforms is relatively young… meaning it’s inevitable that teething problems have emerged.
Some of the heavy hitters that dominate the market at present are known as non-orderbook markets. While it’s tantalizing and somewhat romantic that these platforms are controlled purely by supply and demand, it often results in some unexpected downsides.
There’s one glaring disadvantage that we don’t need to mention too extensively — high swap fees. We currently live in a world where it can cost hundreds of dollars to execute a small number of seemingly straightforward transactions on the best-known decentralized finance protocols. For the DeFi sector’s true potential to shine, these transfers need to be cheaper and faster than anything a centralized rival can provide.
Annoyingly, one of the things that makes cryptocurrencies so exciting can also stand in the way of these assets being practical as a medium of exchange… and that’s blockchain. On networks like Ethereum’s, miners end up prioritizing transactions that pay the highest gas fees — and this can prove calamitous for traders who are in a hurry. Opportunistic users who aim to snap up tokens at low prices risk ending up paying much more than they bargained for, especially if an asset’s value has risen by the time the trade is finalized.
We’ve also seen institutions begin to take a growing interest in this space — and in many cases, these corporations can be big spenders who like to snap up their digital assets in bulk. Right now, DeFi can end up being a poor fit for those seeking to execute big trades, and that’s because the size of these transactions can end up dwarfing the liquidity that’s available in the market.
Experiencing all of these hurdles also assumes that you’ve managed to get to the stage where you’re comfortable with using a DeFi protocol. Clunky, confusing user interfaces can make these ecosystems exceedingly off-putting — even to those who know their way around a traditional trading platform. And given the calamitous consequences that can arise if funds are sent to the wrong place, or if a wrong number is typed into a box, it’s crucial for newcomers to have confidence.
At first glance, it seems a radical rethink is needed to build upon the extraordinary success that first-generation protocols have enjoyed already — protecting the attributes that make DeFi platforms so popular, all while ripping a few pages out of the playbook used by centralized rivals. The end result can be enjoying the perks that a CEX provides, without the inherent dangers associated with putting trust in a third party.
What if bulk buys and bulk sales could be performed without liquidity being a concern, and an asset’s price going through the roof? What if decentralized finance protocols didn’t involve putting up with endless bottlenecks that affect a trader’s bottom line? Is there a way of ensuring that everyone’s transactions are equal, and can all of this be achieved while a user has full control of their funds?
‘The perfect decentralized exchange’
One top priority for the crypto sector needs to center on ensuring that a trading platform, decentralized or otherwise, gives equal opportunities for all. The design of some ecosystems often creates an unpleasant trade-off — one that benefits traders more than market makers, or vice versa.
Orderbooks can serve as a knight in shining armor here — responding to changes in global sentiments on traded assets in a split second. This can help eliminate the price slippage that oh, so many traders end up grumbling about… and put an end to the agonizing waits traders experience while their urgent transactions wind their way through the blockchain at glacial speed.
Polkadex Orderbook brings such a concept to life — ensuring makers can create markets by placing buy and sell orders, and takers can consume them. The project delivers a layer-two system on top of the Polkadex Network, and it’s claimed that the orderbook can accept trades in 20 milliseconds — with capacity for 500,000 trades to be processed per second.
Frontrunning becomes a distant memory by getting rid of fees altogether — meaning there’s a “first come, first serve” mentality toward processing trades. Simultaneously, this deals with the recurring issue of blockchains being too expensive to use.
Although this may initially seem like there’s a risk of centralization creeping into the DeFi space, an innovative twist comes in the form of decentralized Know Your Customer checks. User privacy is preserved thanks to how Polkadex never ends up receiving the details of the traders who use its platform — instead, they merely receive cryptographic proof that the checks have been completed.
Users remain in control of their funds at all times, and traders can also delegate their assets to a third party to benefit from algorithmic trading. An array of trading bots is also supported — including high-frequency trading bots that are geared toward investors of all sizes, giving everyone that split-second advantage that often proves crucial in a fast-moving market. Risk management bots, powered by machine learning, are also becoming more popular.
Polkadex is also set to offer a fully on-chain IDO platform that will deliver a one-stop-shop for new projects, from the fundraising stage to the listing of tokens, all while removing barriers to entry for consumers who want to get on the ground floor of startups they’re passionate about.
According to Polkadex, decentralized exchanges need to evolve — and need to evolve now. The team behind this project believes their approach, which blends a fast orderbook and plentiful levels of liquidity with a slick user experience, could fire the starting gun on a new generation of DeFi.
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Ray Schuetz received a Masters Degree in computer science from The University of Texas (Austin). Ray has been working as a full-time blockchain consultant for the past 3 years. In his spare time, Ray enjoys writing for EthereumCryptocurrency.com and other crypto news publications.