Unveiling the Future of Decentralized Trading: SAFEX Series (Part 1)

After trial and error from operating existing Uniswap implementations and ecosystem research on DEX, Standard labs concluded what needs to change in DEX in crypto. We release the first part of our pre-launch series on the fully on-chain orderbook DEX called SAFEX(Previously New Order), a groundbreaking solution set to revolutionize decentralized trading. Before waiting for the launch for approximately next two months, I would like to introduce why this new DEX is needed and Standard labs put effort to make this. In this series, we will explore the limitations of existing DEXs, delve into the intricacies of the new DEX, and provide an exclusive sneak peek into its cutting-edge features. Join us on this exciting journey as we unveil the future of decentralized trading.

The Challenges with Current DEXs

Traditional DEXs have played a crucial role in enabling secure and trustless cryptocurrency trading. However, they face inherent challenges that hinder their efficiency and fail to adequately incentivize active traders. To fully appreciate the need for the Order Book DEX, let’s examine the limitations of popular DEXs like Uniswap.

Uniswap v2: Limitations and the Need for Evolution

Uniswap v2, the pioneering decentralized exchange (DEX), has experienced limitations that highlight the need for evolution. While it introduced innovative concepts, such as the constant product formula (X * Y = k), there are challenges that hinder its functionality. Let’s explore the key issues surrounding Uniswap v2 and the growing demand for improvements:

1. Limited Control over Trades: Uniswap v2 users face challenges when trying to sell assets at a desired amount and price. The initial constant product formula (X * Y = k) was designed to match orders quickly, regardless of waiting time, in an environment with low trading volumes. However, with the rise in trading volumes exceeding $1 billion, this approach has become less effective. Moreover, the presence of liquidity-manipulating bots, such as sandwich attacks, further complicates trading experiences.
2. Inefficient Capital Utilization: Uniswap v2’s 50/50 liquidity provision model, where liquidity providers deposit equal amounts of both tokens in a trading pair, can lead to inefficient capital utilization. Liquidity providers may be exposed to less desirable tokens, affecting their overall portfolio balance and limiting investment strategies.
3. Impermanent Loss: Liquidity providers on Uniswap v2 are susceptible to impermanent loss. Significant fluctuations in the relative value of tokens within the liquidity pool can result in losses when withdrawing funds, especially during unfavorable price movements.
4. Limited Token Support: The availability of liquidity pools on Uniswap v2 depends on existing tokens and trading pairs. Consequently, new or less popular tokens may lack sufficient liquidity, limiting trading options and overall market activity.

Recognizing the need for improvement, the cryptocurrency ecosystem has seen the emergence of newer iterations, such as Uniswap v3, and alternative DEX platforms.

Uniswap v3: A Step Forward, Yet Challenges Remain

Source: UNISWAP V3 LP — REKT

Uniswap v3 manifested to solve Inefficient Capital Utilization, limited control over trades, and Limited Token Support from previous version with single side liquidity provision and concentrated liquidity, but it still falls short in key aspects. According to Rekt report, two major issues stand out:

1. Impermanent Loss Concerns: Impermanent loss has proven to be a significant problem for Uniswap v3 LPs even with the liquidity concentration. In fact, the study found that impermanent loss outweighed the trading fee income for 80% of the analyzed pools, resulting in a net loss for LPs. A recent study reveals that approximately 50% of Uniswap v3 LPs are experiencing losses compared to simply holding their assets. The promised increased capital efficiency through concentrated liquidity positions seems to have backfired, leaving LPs at a disadvantage.
2. Misaligned Incentives: While Uniswap v3 introduced new features, it fails to adequately reward liquidity providers unless they offer Just-in-Time (JIT) flash liquidity provided by MEV searchers, in which liquidity is added and removed in the same block. Surprisingly, longer-held passive positions fared better than short-term active positions, indicating that actively managed positions did not provide a significant advantage. This misalignment dampens the enthusiasm of active market makers and hampers the overall effectiveness of the platform.

In order to solve impermanent loss concerns and create a more dynamic and efficient trading environment, a new approach is needed. SAFEX offers market participants the ability to sell the amount they want at the price they desire, without relying on predetermined equations. By aligning incentives with active trades and fostering a free market environment, SAFEX aims to revolutionize decentralized trading and provide a more user-centric experience.

Announcing SAFEX

After a year of research and development, Standard labs announce the release of SAFEX, a groundbreaking solution designed to revolutionize the trading experience. This new DEX comprises a fully on-chain algorithm and an innovative incentive mechanism that truly rewards active traders.

Fully On-Chain Orderbook Algorithm

At the heart of SAFEX is a cutting-edge fully on-chain algorithm. This algorithm matches atomic trades efficiently, ensuring seamless and secure transactions. By utilizing two linked lists — prices and order lists— SAFEX achieves unmatched precision in trade execution with transparency and less gas cost than Uniswap.

Incentive Mechanism for Active Traders

SAFEX introduces a revolutionary incentive mechanism that aims to reward active traders. Here’s how it works:

• Traders earn points as members of the DEX by submitting trades, encouraging their active participation in the market.
• Unlike other platforms that keep revenue distribution opaque, SAFEX ensures transparency by displaying protocol revenue and distributing its portion to its members based on their trading activities.
• This incentivization model fosters a free market environment, empowering traders and promoting fair economic opportunities.

Expected Outcomes of SAFEX

1. Trading Platform Without Dark Markets: The Order Book DEX envisions a trading platform that eliminates dark markets. By providing a transparent and regulated environment, it ensures the integrity of trading activities and protects users from fraudulent practices.
2. Transparent Supply and Demand Economic Model for Stablecoin: Through the order book DEX, a transparent supply and demand economic model for stablecoins can emerge. This allows for greater stability and reliability in the cryptocurrency market, enabling users to transact confidently with stable assets.
3. Incentivizing a Free Market: Unlike traditional platforms, which often operate within controlled systems, the Order Book DEX aims to incentivize and promote a truly free market. By rewarding active traders and empowering users, it fosters a dynamic and fair ecosystem where market forces are the driving factor.
4. Oracleless Finance: SAFEX addresses the vulnerability of oracles in decentralized finance (DeFi) by eliminating reliance on them. This reduces the risk of hacks associated with flash loans and oracle manipulations. With transparent and real supply and demand data provided by the order book DEX, DeFi applications can utilize native data sources for various financial instruments like money markets and stablecoins.

In the upcoming articles of this series, we will dive deeper into the intricacies of the on-chain algorithm that powers the Order Book DEX. We will explore its benefits, capabilities, and potential challenges, shedding light on how it revolutionizes the trading experience. Additionally, we will provide detailed insights into the membership program, outlining how traders can participate and maximize their rewards within the Order Book DEX ecosystem.

About Standard Labs

Since 2020, Standard Labs was established in 2020 with the aim of resisting entrepreneurs who only talk but do not take action and ruining the overall crypto’s face with their grifts. Standard Labs, believing that actions speak louder than words, embarked on research to create more practical and beneficial products by eliminating the bubbles of previous projects and focusing on real cases and data. They prioritize creating functional products that actually work, even if it takes time, rather than just making empty promises.