Decentralized trading platforms (or DEX for short) are peer-to-peer trading marketplaces where users can trade and manage cryptocurrency directly, bypassing intermediaries. dex can replace traditional intermediaries such as banks, brokerages, and payment systems, and use blockchain smart contracts to trade assets.
DEX has risen to become the most important infrastructure in the DeFi world, with the rise of the automated market maker (AMM) model achieving explosive growth in DEX trading volume. As DEX heats up, there is no shortage of new competitors entering and the segmentation track is being broadened, mainly including order thinning, aggregation, derivatives, etc.
Automated market maker (AMM) model
With the rapid development of DeFi (Open Finance, known as Decentralized Finance) boom in the blockchain industry in 2020, the AMM model has become the core reason why DEX occupies half of DeFi and enters the public eye.
AMM is a protocol model for automatically providing quotes, which aggregates tokens into a liquidity pool and provides quotes based on a predefined algorithm. Market makers inject tokens into the pool, whereby traders can trade directly in that pool based on a specific algorithm.
Representative platform: Uniswap (https://app.uniswap.org/#/swap)
Strengths: Largest trading platform in the decentralized exchange circuit, holds the majority of the market share, has good liquidity and trading depth.
Order Book Model
The order book type is the earliest type of trading to emerge and is the type of trading used by mainstream CEX. This type of trading is the same as buying and selling on a stock board, where each trader can choose to be either a pending order maker (maker) or an order taker (taker): the maker is responsible for providing liquidity, i.e. hanging buy/sell orders based on their desired price and the quantity they need to trade, and waiting for others to close; the taker will reduce liquidity and close with the pending orders already in the market. Transactions will be done in accordance with the price priority, so the transactions in the order book mode are done at the best price in the market.
Representative platform: MetaTdex (https://www.metatdex.com)
Advantage: Order thin aggregation trading platform built with pure smart contracts, with diversified ecological applications including DEX, DeFi, DAO, GameFi, derivatives, etc.
Aggregator
The DEX Aggregator enables traders to get liquidity and swap rate information from different DEXs on one dashboard. Identifying liquidity from these different sources provides traders with the best rates and the least slippage. This way, traders can get competitive prices from these different sources and choose the best trading option with just a few clicks.
Representative platform: 1inch (https://1inch.io)
Strengths: 1inch #1 DeFi aggregator with maximum liquidity, lowest slippage, best exchange rates
Decentralized Derivatives
A derivative is a contract that derives its value from other underlying assets such as stocks, commodities, currencies, indices, bonds or interest rates. Futures, options and swaps are a few common types of derivatives. Each type of derivative has a different purpose and investors have different trading objectives. Decentralized derivatives have most of the advantages of DEX, such as decentralization, censorship resistance, no licensing required, and a high degree of asset autonomy.
Representative platform: dYdX (https://trade.dydx.exchange)
Advantages: The earliest decentralized derivatives trading platform with the leading Ether Layer 2 scaling solution StarkWare, high efficiency and no GAS fees.
Here is the author's analysis of the future development of several major tracks, who are you most optimistic about?
In the face of fierce competition, DEX needs to continue to capture more liquidity through path optimization to capture value, such as improved innovation around AMM liquidity mining itself to reduce slippage and impermanent loss; traffic integration and transaction path optimization through aggregation protocols; the use of expansion, cross-chain and other technologies to reduce transaction costs; as public chain performance improves, the flexibility of future order book transactions may prompt some DEX mode from AMM back to order book, two modes of DEX will coexist; dYdX is the absolute "unicorn" of derivatives track, but the overall current availability of derivatives DEX is not high, pending the emergence of new trading paradigm.
