State of Decentralized Exchanges
Exploring key differentiators in leading decentralized exchanges (DEX) as token marketplaces.
Decentralized exchanges have some things in common:
On the upside, they do (1) not control of your private keys and do (2) not hold any assets used for trading as a central entity. Because of this, investing and trading on a DEX is secure and the DEX itself impossible to get hacked.
As a consequence and downside, primarily for new crypto investors, a DEX needs to provide (3) more screens (meaning more steps/clicks, and a trading process that is more error-prone to an unsavvy trader) from a UI/UX perspective so that the user can manage their keys or wallets, as well as (4) more information (and more screens for that) on the orders and transactions in the order book so that the trader can make their decision as to which trade to take, when, and at what gas price.
To sum it up until here, DEXs to this day face a tradeoff between usability and security.
On the technical side, a DEX has (5) protocol dependency in terms of speed, costs and range of tokens it can offer. Since there is no central middleman matchmaker in a DEX, the transactions always depend on some underlying protocol, usually in one of two ways: in option 1 the DEX maintains an on-chain order book where the trading of tokens is facilitated by smart contracts (transaction speed then depends on Ethereum network congestion which can be slow). In option 2, the DEX maintains an off-chain order book and facilitates transactions through an on-chain trading protocol like 0x (meant to be faster). Whichever option, the range of tokens a DEX can offer is defined by the underlying protocol(s). If transactions are facilitated through smart contracts, the DEX offers only ERC20/Ethereum-based tokens since that is what smart contracts are based on.
Lastly, a DEX is the epicenter of the movement towards decentralization. A DEX therefore is often (6) funded through an ICO.
To sum up the second part, DEXs to this day also face a tradeoff between liquidity and transaction speed against transaction costs.
Factors of Comparison:
(1) Description
(2) Use case / utility
(3) Handled tokens / assets
(4) Target audience / usability
(5) ICO Status
(6) Comments
For easier readability: PPTX deck of comparison here
Comparing list of DEXs:
Where are DEXs heading?
“… In the mid-term … we are going to see extremely strong network effects around some of the decentralized exchanges which provide the biggest liquidity driven by UX, security, transaction costs but also marketing and hype what I consider very risky and cost-inefficient….”
“In a decentralized world, there is no way without decentralized exchanges…”
The truth is probably somewhere in between. What do you think?
[Disclosure: Catena Capital is affiliated with Herdius. Thank you Balazs Deme for providing the content of the slides.]
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