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Current Costs to Trade on DEXes

The rise of DEXes, problems with DEX trading, and the ZeroSwap Solution.

The rise of DEXes

Decentralized exchanges (DEXes) have become extremely popular over the past two years with their daily trading volumes growing continuously. This rising popularity is a result of growth in liquidity, improving UX, and greater trust in newer platforms.

Unlike centralised exchanges (CEXes), a decentralised exchange runs without central control thus all operations are facilitated by members within the network. DEXes, therefore, allow peer to peer trading of cryptocurrencies in a trustless environment. All operations on a DEX are automated thus eliminating the need for a central authority acting as an intermediary for all transactions. This has contributed greatly to the mass movement from CEXes to DEXes within the crypto community, as people prefer to not give up control of their assets to centralized exchanges due to numerous risk such as hacks.

Besides their core functionalities, DEXes offer users more benefits as compared to CEXes, creating more impetus for traders to migrate.

Firstly, users do not need to transfer their digital assets to a DEX in order to trade, therefore reducing the risk of losing their funds from hacks that are common with CEXes or transfers to the wrong address.

Secondly, DEXes do not require users to fulfil Know Your Customer (KYC) details which allows them to trade anonymously. Moreover, this eliminates the risk of identity theft in the case of a data breach as evidenced in previous CEX hacks. These features act as an extra layer of security ensuring the protection of both user’s private information, and funds.

Thirdly, market activity on DEXes is automated with algorithmic matchmaker and taker offers. This helps in preventing artificial price manipulation and faking trade volumes that are synonymous with CEXes.

Trading on DEXes has grown exponentially in 2020; fuelled by the rise of DeFi and cryptocurrency swaps. This explosive growth was evidenced at the beginning of the year with the total trade for the first 4 months of 2020, amounting to $2 billion; almost matching that of the entirety of 2019 that stood at $2.4 billion. The surge of DEX trading is continuing throughout this year with huge spikes recorded in the summer. For context, over $2.4 billion was traded on DEXes within one week of August, thus equalling 2019 whole year volume within 7 days. At the present time of writing, over $17.4 billion was traded over the last 30 days with slightly over $3 billion volume within the past 7 days alone.

DEX 7 days volume (Source: DuneAnalytics)

According to data gathered from Dune analytics, much of this volume occurred on top DEXes such as Uniswap, Balancer, Kyber, Synthetix, Bancor, Loopring, DDex, Curve, 0x, Idex, Dydx, Oasis, and Gnosis. Uniswap continues to dominate the space with its current market share standing at around 72.4%.

Problems with DEX Trading

Although DEXes confer multiple benefits to traders, they have their fair share of challenges that make the trading experience less efficient and quite costly. Ironically, it is the growing popularity of DEXes that is helping cause its biggest problem; rising gas costs.

Most of the existing DEXes are built on the Ethereum blockchain and play a huge role in facilitating the exchange of tokens on the network. The Ethereum protocol charges gas fees to fuel each transaction on the network. This is payable through its native Ether cryptocurrency and is denominated in Gwei which is one-billionth (one Nano) of ETH.

Interestingly, Ethereums blockchain gas fees differ depending on the kind of the transaction being made. For instance, a smaller amount of gas is needed to send ETH as compared to sending tokens. It becomes even more expensive to trade on DEXes as the network demands higher fees for interacting with smart contracts. The costs rise with the increasing complexity of the smart contracts, sometimes with multiple layers to execute simultaneously thus requiring a trader to pay a lot more while trading with more sophisticated DeFi platforms.

With many more users jumping onto the DeFi frenzy, gas fees have created problems for DEXes in more than one way.

Firstly, ETH price has risen sharply due to the increased demand from traders rushing to acquire ETH for their foray into the highly lucrative DeFi sector. Secondly, the number of transactions has ballooned causing traders to use a higher gas price to ensure that their trades are processed fast enough.

For context, data from EthGasStation shows that during calmer periods, the cost goes as low as 2 Gwei with 30 Gwei considered to be extremely high. This figure dwarfs the all-time high of 5,587 Gwei recorded within the last 30 days.

Ethereum daily gas used over time (Source: TradeBlock)

Unsurprisingly, Uniswap, the top DEX, recorded the highest fees during this period. Totalling to $12.7 million at an average cost of 117 Gwei. Other popular DEXes such as 1inch, IDEX, Curve, and Kyber Network recorded similarly high fees of $1.49 million, $665,000, $596,000, and $501,000 respectively with each platform averaging over 100 Gwei per transaction.

The combination of these factors has made trading on DEXes uneconomical and pretty much impossible for the average trader. If this persists, DEXes will turn into a playground for crypto whales and wealthy bag holders only.

How Gasless Transactions solve this with ZeroSwap

At ZeroSwap we believe in the true decentralization of finance and are working towards achieving this goal. One of the main ways that we can achieve this is by democratizing money and financial services by making them available to everyone in the world. In this respect, we are building the first completely free decentralized platform that gives power back to the people in the spirit of Satoshi Nakamoto.

ZeroSwap is a multi-chain trading protocol that allows users to participate in the super exciting DeFi space at zero cost thus helping maximize their returns. For starters, we are developing the platform on Ethereum and Binance Smart Chain as they are the most popular DeFi networks currently. Users will be able to make on-chain trades on these decentralized networks for free, which will greatly enhance the provisioning of, and access to liquidity. This is a departure from the industry-standard where DEXes are charging fees equal if not higher than their CEX counterparts.

At ZeroSwap we aspire to deliver a much more fulfilling and seamless trading experience by eliminating all hindrances impeding financial freedom for everyone. In this regard, we are also deploying an innovative solution that facilitates gasless transactions through transaction fee mining. This solution is a much-warranted reprieve for the millions of traders on the Ethereum network currently struggling with untenable gas fees.

We aim to set the pace through these solutions and look forward to their industry-wide implementation to provide the much-needed springboard for widespread crypto adoption.

What’s Next?

Stay tuned for our next post in the insightful series and unfolding of the ZeroSwap Protocol Architecture.

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