Hybrid Theory: The Rise of Hybrid Decentralised Exchanges
Hybrid DEXs are the next step to creating truly on-chain and fair markets. They are DEXs that retain the crypto primitives of decentralised and permissionless asset trading while adding features found on centralised exchanges to bring a truly streamlined user experience. Onomy Protocol is launching a Hybrid DEX, but what exactly are they, how do they work, and why is it so important for crypto’s future? Let’s find out.
The Joy of CEX
Many love the CEX experience. For the average retail user, centralised exchanges are streamlined, hand-holding experiences that let you trade lots of different tokens quickly and easily, while having a user-friendly UI that just begs you to click the buttons. A good market needs deep liquidity, and entities like Binance have — despite crypto diehards gnashing their teeth at the thought — done wonders for crypto’s acceptance into mainstream retail trading.
Yet there is a problem. One so acute it’s been dialled in as a mantra among those in the know. Not your keys, not your crypto. When trading on a CEX, you don’t retain true control over the crypto: the centralised provider does. All you own are ownership rights that give you a claim to those tokens.
Points of Authority: Problems with Centralised Entities in Crypto
So what? Well, recent rumours about the insolvency of leading exchanges and inability to meet their liabilities have led to people worrying that their crypto could disappear in a corporate conflagration. If it sounds far-fetched, a known centralised lending firm argued (upon going belly up) that its users surrendered the right to their crypto when depositing.
Centralised providers will always have this fatal flaw. Satoshi’s cypherpunk dream was of a financial system separated from centralised control — ‘a peer-to-peer electronic cash system.’ As crypto grows, it’s come to mean a peer-to-peer financial system. The markets will truly live on-chain; and so will the market makers.
Big DEX Energy
DEXs have grown tremendously in volume. They are decentralised platforms of exchange — a way to retain crypto primitives while making healthy, liquid markets, while pushing market-making into the hands of everyone. Web3 is about breaking old service paradigms, about creating permissionless exchange of activity and value.
DEX adoption has gone through the roof. In Feb 2020, $1.8 billion was traded on Ethereum DEXs in a month. Just over a year later, in May 2021, that figure reached $203.95 billion. That’s only Ethereum. Uniswap alone recently blazed past the trillion dollar lifetime volume. This doesn’t even begin to account for all the trading done on other DEXs on other chains. Trading on DEXs, between April 2021 and April 2022, outstripped daily CEX volume. The path is clear; decentralisation is being embraced.
There is good reason for this. By being decentralised, you never lose control of your money, and the tokens you trade are not ordained by centralised bureaucrats — to list or not to list is no longer an entity’s question to answer, it’s yours. Uniswap was first, hundreds have followed. Everyone wants a bit of big DEX energy: your money traded your way.
The Shortcomings of a Standard AMM
Like with all new technologies though, the problems with DEXs are legion — especially compared to their shiny CEX siblings. There is a paucity of function. Often only basic swap trades are available (immediate/market orders). The tokens available on a DEX are confined to their own chain, be that Ethereum (ERC-20), Binance Smart Chain (BEP-20), or whichever. If a DEX supports multiple chains, users have to bridge their tokens appropriately and switch networks within different browser extensions constantly.
Gas fees can, at times, exceed traditional exchange fees. DEXs frequently have no real charting engines like TradingView, so it’s difficult to quickly assess a token’s performance or place your fancy Moon Phases indicator. And very few DEXs have mobile support — it’s browser or bust. These issues have hampered DEX’s continued growth, with their dominance lagging in recent months, falling to 55% of overall trade volume.
For experts, this can all feel second nature — although it’s alarmingly fiddly. For beginners, forget about it. Stay in the warm neon glow of a CEX, but only trade hand selected assets and lease true asset ownership.
Even for experts though, the lack of functions like limit buys and stop-losses, market and conditional orders, and profit taking orders, seriously hurt strategy. If you wanted to execute a trailing stop-loss strategy on a DEX, well, good luck. You need to be glued to the screen, with an infinity of browsers open, just to even try — and even then you might fail to catch the optimum window.
The Best of Both Worlds: What Is a Hybrid DEX?
The answer is obvious. Big DEXs need CEX energy to function. In the battle between AMMs and order book systems — the answer is both. This is where Hybrid DEXs come in.
An AMM has fantastic crypto primitives, is governed by smart-contracts, incentivises liquidity though LP tokens, has permissionless exchange, and every token (on the compatible chain) is available. This is why they are popular. Order books have ease-of-use, traditional trading functions, better charting/data, and sleek UIs. The key is to combine the two, and that’s what a Hybrid DEX is: an orderbook system on a decentralised exchange. A DEX that retains all the essential elements of decentralisation, but offers the functionality akin to that of a centralised order book exchange.
A Hybrid DEX, like Onomy Protocol’s, will thus bring the CEX experience on-chain. DEXs need to give traders the facilities a CEX provides so that traders retain custody of their crypto when they trade, they need to be cross-chain so users can do all their trading in one place, on browser and on mobile, and they need better UI so beginners don’t run for the hills.
A Cure for the Itch: How Hybrid DEX Technology Is Advancing
Onomy’s Hybrid DEX overlays an orderbook on top of the AMM. With the orderbook, users can buy and sell just like they would on a normal CEX. Except with Onomy, there are zero static fees for doing so like the ones found on strictly AMM DEXs averaging 0.3% of the trade, making trades more capital efficient. The only fee is a tiny gas fee — far lower than Ethereum’s, and magnitudes lower than a CEX — that is paid with the $NOM token.
This order book gives you the CEX experience on-chain. You can create a string of buy and sell orders and let your strategy unfold without ever having to surrender your crypto to someone else. The Onomy Exchange has TradingView built directly into the product so you can analyse, observe, then execute — just like you can on a CEX.
So how do liquidity providers make money, if there are no trading fees? It works like any traditional orderbook. When you buy on Binance, or on the New York Stock Exchange for that matter, market makers providing liquidity on both ends of the trade capture the difference between the bid (buying) price and the ask (selling) price as profit. On Onomy’s Hybrid DEX, it’s the underlying AMM that acts as the market maker, so the spread is automatically sent to LPs based on their pool ownership.
Trade Multi-Chain, On-Chain
On DEXs, an actual asset exchange occurs between tokens that are ‘live’ on the chain, so each token exchanged must be compatible with the chain it’s built on. This is restricting. A trading strategy needs to move fluently cross-asset with no restrictions. Onomy’s Hybrid DEX is its very own application-specific chain, based on Cosmos, and is connected to all Cosmos blockchains through the IBC. It’s also built directly on top of the Onomy Arc Bridge Hub, connecting it to Ethereum, Avalanche, Polygon, Aurora on Near, and others, with the goal of becoming the ultimate inter-chain hub for all decentralised trading needs.
For the user this means that — in practice — you can trade an ERC-20 token like $MAKER for an IBC-enabled asset like $SCRT directly inside the Onomy Exchange without having to leave the dApp — just like you could on Binance, except in Onomy’s case it’s non-custodial and the trade is on-chain. As soon as the limit order is filled, you’d find $SCRT inside the Access multi-chain mobile wallet application.
Onomy’s cross-chain ecosystem is one that recognises that — with the growth of chains like Cosmos, Avalanche, Solana, Near, and other pretenders to Ethereum’s throne — a multi-chain future is guaranteed, and on-chain traders need a solution to participate in it. An instance of Onomy’s Hybrid DEX will be present on all these chains to serve loyal liquidity, and will directly connect to the main L1 Onomy Exchange.
Diverse Tokens and Built-In Wallets: Other Features Jumping to the Decentralised Ship
Another major advantage of CEXs is the built-in wallet that holds all of your crypto. Onomy’s mobile Access Wallet is an attempt to replicate that on-chain, keeping all the ease-of-use but not taking custody of private keys. This expands beyond asset storage and opens up a central value management hub, through which users can engage in multi-protocol staking and governance, or hold their NFTs no matter the source chain.
CEXs also have huge token pools that span many chains to trade from. Remember, this is because — rather than any real trade taking place — the CEXs have ‘chips’ that represent your tokens. That means they don’t need chain-compatibility to execute token trades.
DEXs do have a major advantage over CEXs with token pools though, in that the DEX does not (and cannot) gatekeep what assets are available to trade. Anyone can set up a liquidity pool and trade their token, which helps bootstrap public markets even for more exotic assets.
One Step Closer: How Hybrid DEXs Fulfil the Promise of Decentralised Exchange
For Onomy, the goal is to create an on-chain ecosystem that mimics the user experience of FinTech applications, across the suite of financial products. By doing so, all the incredible underlying principles of the decentralised world are achieved without sacrificing user experience, user onboarding, and indeed user success, inching closer to Onomy’s goal of onboarding Forex-level volumes into DeFi.