Decentralized Finance (DeFi) is the new buzzword coined by the cryptocurrency community to call blockchain-based fintech. They are described as financial mechanisms that disintermediate traditional finance and allows direct peer-to-peer transactions within a blockchain network. Through these mechanisms, individuals can participate without having to rely on third-party intermediaries or centralized authorities. To put it simply, DeFi are financial services and products that are built on top of distributed ledger technology (DLT).
One of the most popular DeFi application are Instant Liquidity Exchanges or automated exchanges. They offer users an easy, fast and direct method of exchanging digital assets. Users will not have to deal with the order books which might be too complicated for new users. Instant liquidity exchanges allow users to access their liquidity pool and trade against it. The largest collection of DeFi applications are built on top of Ethereum and one that has been gaining much traction Uniswap. According to its website, Uniswap is a fully decentralized protocol for automated liquidity that is open and accessible to all.
However, the persisting scalability issue of Ethereum presents an opportunity for another more scalable and cost-effective blockchain to offer a superior product. The first and largest EOS decentralized exchange (DEX), Newdex is taking full advantage of this opportunity by launching its own instant exchange dubbed as Newdex Swap, expanding its service offering to a new kind of decentralized exchange without the often convoluted process of having to learn how to work the order books of decentralized exchanges.
What are Instant Liquidity Exchanges?
Many of you might be asking what is the difference between this new form of decentralized exchange compared to its existing one. Traditional dex like what Newdex currently uses have order books. Order books are simply a list of orders that a particular exchange uses to record the interest of buyers and sellers. Instant Liquidity Exchanges do not use order books, it enables traders to trade directly with the pool making it easier, faster and less complicated. Newdex Swap is a new breed of decentralized exchange that belongs to liquidity pool exchanges.
We can classify decentralized exchanges into types. One that relies on order books which we can call Peer-to-Peer Order Books exchanges and the other as Liquidity Pool Exchanges. The former relies on the orders (bid/ask) of traders in the platform to fulfill trade. Take for example Newdex which uses an on-chain matching and settlement to complete trades on its platform. Orders are executed once an opposite order at the same price becomes available. This works well if there are enough buyers and sellers in the market.
Liquidity Pool Exchanges works a lot differently than Order book-based decentralized exchanges. Instead of relying on buyers and sellers, it uses a liquidity pool which is just a form of automated market maker governed by smart contracts. Liquidity pools are designed to perform trades and maintain pricing to ensure that the value of each reserve stays constant. Since the smart contract takes care of pricing, the liquidity provider does not need to constantly monitor the prices of assets in multiple exchanges.
The Advantage of Newdex Swap
Liquidity Pool Exchanges like Newdex Swap have many advantages over the order books type decentralized exchange. One advantage is guaranteed liquidity at every price level by removing the reliance on trade volume of the platform. Another advantage is being able to earn passively by being a liquidity provider, this can be done by, simply depositing digital assets into the liquidity pool and the smart contract manages the prices of these assets. Lastly, anyone can become a liquidity provider without needing to under KYC procedures.
How can users benefit from this new form of decentralized exchange?
Supporting the two different types of decentralized exchanges (DEX) presents some interesting opportunities for Newdex traders. First, traders can take advantage of price differences between the two DEXs. If there is a price difference between the traditional order book DEX market price and the Newdex Swap pool price, users can do arbitrage between the two. According to Wikipedia Arbitrage is the practice of taking advantage of the price difference between two or more markets and capitalize on their imbalance.
As mentioned earlier, Newdex users can become liquidity providers. The threshold of becoming a liquidity provider is just 1 EOS. All the revenues generated by swappers goes to the liquidity providers. This gives Newdex users an additional stream of revenue aside from making profits in trades and a more profitable option than just holding digital assets. With this new financial instrument, Newdex continues to lead decentralized finance in the EOS ecosystem as well as the current and future supported chains on its platform.
The Newdex Swap function debuted last April 2, 2020, which can be accessed using PC and in Dapp wallets. It provides Newdex users a quick and safe interface to seamlessly Swap EOS coins and EOS-based tokens. The new swap function gives users new ways to earn from their cryptocurrency holdings and allow them to do this without too much risk and exposure. Built on top of EOS one could expect transactions in this instant liquidity exchange will be faster, less expensive and less risky as it will not be exposed to latency issues that may result in opportunity cost and loss of value due to slow and expensive transactions fees.
The above article is a commissioned work for Newdex. I was tasked to write an article about its Newdex Swap Instant Liquidity Exchange. Total creative freedom was given to me. All the information stated above came from my own research and based on my experience and knowledge. It has not been edited by Newdex or any of the aforementioned projects in the article.
Cross-posted from Steemit and in my other blockchain-based social media accounts.