Decentralized exchanges (DEXs) have enjoyed an upward trajectory since the launch of Uniswap on the Ethereum network in 2018. This is evident from the volume of annual transactions, which has been steadily rising over the past few years. In fact, according to The Block, the total trading volume of DEXs reached a record $1.1 trillion in 2021.
This was achieved across the top 35 DEXs currently operating on Ethereum and other blockchain networks. It marked an 858% increase from the previous year. And between April 2021 and April 2022, on-chain transaction volumes for DEXs were higher than those of centralized exchanges (CEXs), a sign that more people are open to the idea of a decentralized financial system.
However, DEXs still have a long way to go. As decentralized finance (DeFi) has grown in popularity and application, it’s become apparent that DEXs are far from what they need to be. They face particular challenges that stop them from reaching their full potential.
The interoperability problem
Current blockchain technologies exist on their own individual networks. As a result, there is no interoperability, i.e., a direct way to transfer data from one network to another. This makes moving and swapping cryptocurrencies between different blockchains complicated, to say the least.
For instance, if someone wants to move their funds from Solana’s network to Ethereum’s network, they have two options:
- Deposit their assets from Solana into a centralized exchange, then withdraw their assets via a centralized exchange, trade them for ERC-20 tokens that work on Ethereum, and then transfer them to a wallet on the Ethereum network, or
- Use a cryptocurrency bridge to convert their cryptocurrencies from Solana-version tokens into ERC-20 tokens that can operate on the Ethereum network.
Option one takes time and effort. It’s also counterintuitive to DeFi’s vision of DEXs eventually replacing CEXs. Option two isn’t much better. Transfers take minutes, hours, or even days to complete. And, both options cost extra fees. CEXs charge trading fees, while crypto bridges charge service fees.
This means that whichever way the user goes, they are in for a poor experience. Very few people will be happy having to make multiple transfers to move funds from one chain to another. Similarly, waiting hours or even days (during very high network congestion) to complete a cryptocurrency bridge transfer is frustrating.
It’s even worse if one is a trader. This is because crypto markets move fast. One hour is often the difference between making and losing money. Therefore, transfer delays during bridging are a massive problem for traders. Add the high gas costs, and investment activities like arbitrage trading become infeasible.
Another group greatly affected by this situation are the low volume users. The high gas fees make exporting and importing cryptocurrency between chains an unattractive option for many. Therefore, most of them are limited to a certain DEX, denying them the opportunity to enjoy cool projects in other ecosystems.
An omnichain DEX changes everything
Interoperability is the best way to make decentralized finance an attractive option for everyone. One way to achieve this is by creating an omnichain DEX. Such a platform should allow users to swap digital assets from various blockchain ecosystems.
This will streamline cross-chain transactions by allowing for;
- Faster transactions: An omnichain DEX that integrates various blockchain ecosystems makes for faster transactions than is possible with current crypto bridges. Therefore, traders can capitalize on the best trades across different DeFi protocols before the opportunities disappear.
- Cheaper transactions: Such a DEX will also make for cheaper transactions. Users won’t have to pay the high gas fees at crypto bridges or the trading fees at CEXs. This will make cross-chain transactions and trading a more accessible option for low-volume DeFi users.
- Good user experience: Ultimately, faster and cheaper transactions create a great user experience. This will attract more users to DEXs and the DeFi world as a whole.
The benefits of an omnichain DEX extend beyond the platform’s users to include the tokens and projects being traded. According to Sifchain, who are currently working on OMNI EVM, their version of an omnichain DEX, such a platform will benefit a project in the following ways;
- Increased availability of the project’s tokens: Tokens from one ecosystem will be widely available to all ecosystems included in the omnichain platform. This creates more active use cases, users, and token holders, which then decreases the selling pressure.
- Expanded ecosystem: Other tokens in the omnichain DEX will be available to everyone building on the project’s ecosystem. This leads to increased utility and interoperability since project building can utilize and interact with any token in the ecosystem.
The Way Forward
DeFi is one of the fastest-growing innovations in the world. Every year, new users join the ecosystem in their millions. These users need fast, low-cost transactions across multiple chains. However, seamless cross-chain transactions are still a challenge due to the siloed architecture of current blockchain technologies.
One solution would be to rebuild the most widely-used blockchains with interoperability as a key feature. However, this will probably never happen. So, the best way forward is the development of omnichain DEX(s) that support token swapping between blockchains. These will form the next generation of blockchains.
Decentralized exchanges (DEXs) have enjoyed an upward trajectory since the launch of Uniswap on the Ethereum network in 2018. This is evident from the volume of annual transactions, which has been steadily rising over the past few years. In fact, according to The Block, the total trading volume of DEXs reached a record $1.1 trillion in 2021.
This was achieved across the top 35 DEXs currently operating on Ethereum and other blockchain networks. It marked an 858% increase from the previous year. And between April 2021 and April 2022, on-chain transaction volumes for DEXs were higher than those of centralized exchanges (CEXs), a sign that more people are open to the idea of a decentralized financial system.
However, DEXs still have a long way to go. As decentralized finance (DeFi) has grown in popularity and application, it’s become apparent that DEXs are far from what they need to be. They face particular challenges that stop them from reaching their full potential.
The interoperability problem
Current blockchain technologies exist on their own individual networks. As a result, there is no interoperability, i.e., a direct way to transfer data from one network to another. This makes moving and swapping cryptocurrencies between different blockchains complicated, to say the least.
For instance, if someone wants to move their funds from Solana’s network to Ethereum’s network, they have two options:
- Deposit their assets from Solana into a centralized exchange, then withdraw their assets via a centralized exchange, trade them for ERC-20 tokens that work on Ethereum, and then transfer them to a wallet on the Ethereum network, or
- Use a cryptocurrency bridge to convert their cryptocurrencies from Solana-version tokens into ERC-20 tokens that can operate on the Ethereum network.
Option one takes time and effort. It’s also counterintuitive to DeFi’s vision of DEXs eventually replacing CEXs. Option two isn’t much better. Transfers take minutes, hours, or even days to complete. And, both options cost extra fees. CEXs charge trading fees, while crypto bridges charge service fees.
This means that whichever way the user goes, they are in for a poor experience. Very few people will be happy having to make multiple transfers to move funds from one chain to another. Similarly, waiting hours or even days (during very high network congestion) to complete a cryptocurrency bridge transfer is frustrating.
It’s even worse if one is a trader. This is because crypto markets move fast. One hour is often the difference between making and losing money. Therefore, transfer delays during bridging are a massive problem for traders. Add the high gas costs, and investment activities like arbitrage trading become infeasible.
Another group greatly affected by this situation are the low volume users. The high gas fees make exporting and importing cryptocurrency between chains an unattractive option for many. Therefore, most of them are limited to a certain DEX, denying them the opportunity to enjoy cool projects in other ecosystems.
An omnichain DEX changes everything
Interoperability is the best way to make decentralized finance an attractive option for everyone. One way to achieve this is by creating an omnichain DEX. Such a platform should allow users to swap digital assets from various blockchain ecosystems.
This will streamline cross-chain transactions by allowing for;
- Faster transactions: An omnichain DEX that integrates various blockchain ecosystems makes for faster transactions than is possible with current crypto bridges. Therefore, traders can capitalize on the best trades across different DeFi protocols before the opportunities disappear.
- Cheaper transactions: Such a DEX will also make for cheaper transactions. Users won’t have to pay the high gas fees at crypto bridges or the trading fees at CEXs. This will make cross-chain transactions and trading a more accessible option for low-volume DeFi users.
- Good user experience: Ultimately, faster and cheaper transactions create a great user experience. This will attract more users to DEXs and the DeFi world as a whole.
The benefits of an omnichain DEX extend beyond the platform’s users to include the tokens and projects being traded. According to Sifchain, who are currently working on OMNI EVM, their version of an omnichain DEX, such a platform will benefit a project in the following ways;
- Increased availability of the project’s tokens: Tokens from one ecosystem will be widely available to all ecosystems included in the omnichain platform. This creates more active use cases, users, and token holders, which then decreases the selling pressure.
- Expanded ecosystem: Other tokens in the omnichain DEX will be available to everyone building on the project’s ecosystem. This leads to increased utility and interoperability since project building can utilize and interact with any token in the ecosystem.
The Way Forward
DeFi is one of the fastest-growing innovations in the world. Every year, new users join the ecosystem in their millions. These users need fast, low-cost transactions across multiple chains. However, seamless cross-chain transactions are still a challenge due to the siloed architecture of current blockchain technologies.
One solution would be to rebuild the most widely-used blockchains with interoperability as a key feature. However, this will probably never happen. So, the best way forward is the development of omnichain DEX(s) that support token swapping between blockchains. These will form the next generation of blockchains.
