The Next Wave of Decentralised Exchanges

The rise in the popularity of decentralised exchanges in 2020 has been remarkable, but current technology still has several constraints. In the below summary, I will briefly introduce a few newcomers that are eager to take decentralised finance into its next phase.

The rise in the popularity of decentralised exchanges (DEXs) in 2020 has been remarkable, but current technology still has several constraints. Although the DEXs are maturing, they often suffer from relatively high fees, limited functionality, low liquidity, and scalability issues. The next wave of decentralised exchanges is looking to fix many of these problems by introducing new trading features, reshaping market-making economics, improving user experience, and eliminating the scalability bottleneck. Decentralised margin trading is still a small piece of the on-chain DeFi landscape, and it’s an area of tremendous growth opportunity. In the below summary, I will briefly introduce a few newcomers that are eager to take decentralised finance into its next phase.

The Vega Protocol team is developing a platform for safe and non-custodial decentralised margin trading (launching with futures trading) for professional traders. This vision is realised through a protocol for creating and trading derivatives on a fully decentralised network. With the Vega Console, traders will be able to operate and participate in peer-to-peer markets that guarantee open access, transparent rules, and freedom to innovate. There are no central servers; everything occurs on the chain and Vega provides a number of APIs to trade automatically and interact with the protocol itself. The exchange supports high-speed trading by implementing on-chain matching on a high-performance blockchain. The team aims to build a platform that is truly open and permissionless. Anyone in the world will be able to propose and create their own markets (that will go through the on-chain governance process concluded with a token holders vote). On the market maker side, Vega is innovating by introducing a program that intends to reward liquidity providers for incubating and growing healthy markets (their dynamic model rewards providing liquidity to less popular markets). Vega’s public beta launch is planned for early autumn and you can sign up for it here.

DerivaDEX is a decentralised exchange focused on the trading of derivatives contracts. Built on Ethereum, the project aims to become a community-owned exchange with a liquidity-mining token model. The exchange’s DDX token will allow holders to take part in governance and operations. DerivaDEX is looking to address a lot of issues associated with existing DEXs. They will use a DAO (decentralised autonomous organisation) to mitigate the single point of failure, it will have on-chain settlement (without the use of automated market makers currently implemented by other DEXs) and a liquidity boosting program (incentivised mining model). DerivaDEX has assembled an all-star team of early investors ahead of its Q3 2020 launch (including Coinbase Ventures, Polychain Capital and Electric Capital). The team plans to kick off a series of incentivised opportunities for early partners and adopters, including testnet competitions, insurance mining, and more. You can sign up here for early access to the platform.

Demex aims to become the first fully decentralised platform that supports any type of financial market possible: “You are limited only by your own imagination” — the team states. And they do have a proven track record when it comes to building decentralised exchanges. Demex is developed by Switcheo — decentralised spot exchange (it handled over $50M on smart contracts with no funds lost). Both exchanges will be operating on TradeHub, a purpose-built sidechain for trading (it uses Cosmos SDK as an underlying technology). It will come with a public liquidity pool and native automated market maker for every market, allowing anyone to earn interest by simply contributing their tokens to the pool via TradeHub’s user interface. Switcheo has secured reputable validators to verify trading transactions on TradeHub: Neo Foundation, Zilliqua, Binance Pool and Huobi Mining Pool, to name a few. Demex exchange aims to be truly permissionless (no registration, no personal data and no chance of a KYC leak), censorship resistant (specialised DPoS blockchain trading engine) with no front-running and overloads issues. They are aiming for a beta launch in September 2020 and you can read more about it here.

Decentralised exchanges’ performance limitations, high fees and scalability issues could be a serious hindrance to professional traders, especially high-frequency trading companies. The solution to these issues could be in full on-chain custody and off-chain order matching. This exact approach has been taken by Nash, a non-custodial exchange that makes use of an off-chain matching engine to achieve competitive performance, including cross-chain trading. The exchange supports high-speed trading with no counterparty risk suitable for professional traders. It has a fast and simple user interface but also a myriad of tools for algorithmic trading (secured by address whitelisting and MPC-powered decentralised APIs). Nash’s cross-chain matching engine supports non-wrapped BTC, ETH and NEO. Their trading protocol uses similar primitives to the Lightning Network, and thanks to this, they’ve managed to avoid the custodial step involved in “token wrapping”; the most common method by which decentralised exchanges support cross-chain Bitcoin trading. Something else of interest is that Nash is building a suite of products to accompany the non-custodial exchange: a non-custodial, multi-chain wallet and crypto-to-fiat payment system called “Nash Pay”. Nash exchange is currently at MVP stage (minimum viable product) with the aim to reach general availability by the end of 2020. You can sign up for the exchange here.

Despite the significant growth of decentralised crypto exchanges, their centralised counterparts still control the majority of industry trade volume. The projects outlined above are just a few examples of innovation in the decentralised exchange space. The next wave of decentralised exchanges looks to introduce new trading features, reshape market-making economics, improve user experience, and eliminate the low-performance bottleneck. Many of them pursue developement of decentralised margin/options trading products, as this sector could become DeFi’s next expansion opportunity. Undoubtedly, there is still a lot of room to grow within the DEX space and the race for the next generation of decentralised exchanges appears to be heating up.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.