Decentralized Exchanges – Opportunity, Challenges and Solutions

The trade volume war between the centralized exchange (CEX) and decentralized exchange (DEX) is going on since long. A look at the DEX to CEX Spot Trade Volume by blockcrypto.com reveals that the DEX trading volume is on a rise since May 2021. At present, more than 10% of the total spot trade volume is traded over decentralized exchanges. A significant shift of trade volumes from CEX to DEX is being witnessed. This is happening because centralized crypto exchanges have turned into a breeding ground of market manipulation and custodial issues. As a result, a heavy uptick has been observed in the development of decentralized crypto exchange software.

While there are various opportunities in DEX development, we must not ignore the fact that the adoption will continue to face challenges and roadblocks for a while.

Let us take a look at the opportunities, challenges, and solutions in DEX development:

What is a Decentralized Exchange (DEX)?

A Decentralized Exchange is a crypto exchange platform that promises true decentralization of cryptocurrency trade. To enable this, DEX allows counterparties to directly trade with each other. Additionally, the users need not transfer the custody of their assets to the exchange, thereby minimizing the asset custody risk.

Designed in a way that it actually requires no central authority to facilitate trading, the DEXs promise a lower risk of hacking, lesser trading fees, and involvement of no intermediary.

What opportunities do DEXs offer?

As a crypto exchange platform operator, it is important for you to understand the “no centralized authority” concept of DEXs.
Whether a decentralized exchange is built from scratch or it’s white label crypto exchange software, decentralized exchanges have no central points of failure. To ensure this, the DEXs are designed to operate in a non-custodial fashion and the full control of private keys is handed over to the user. Such a design brings different advantages to both the exchange user and the operator:

Opportunities for DEX users

• Lower transaction fees
• Hack resistance
• Lesser downtime

Opportunities for DEX Operators

• Lesser operation cost as all the operations are managed by pre-programmed smart contracts.
• No government or regulatory body can censor any trade or operations of a decentralized exchange.
Currently, the two most popular ways to operate a DEX are:
• Order books-based DEX

Decentralized exchanges do not require the user to compromise the custody of their assets. To achieve this, the orders are executed using smart contracts. However, the cryptocurrency exchange software for order books-based DEX can be designed to operate in an on-chain or off-chain model. The former method is a little impractical as it requires every node to record the order forever. This makes them slow too. On the other hand, the off-chain order book DEX is faster as they use intermediaries known as relayers to manage off-chain order books.

• AMM based DEX
The order book-based DEXs suffer from liquidity issues. This is where AMMs play a pivotal role as it incentivizes users to pool in their tokens to ensure there will always be liquidity for otherwise illiquid markets. However, AMMs also suffer from some issues like Impermanent Losses (IL).

What challenges do DEXs face?

Currently, the DEXs face issues to stabilize asset prices. This means that the trader might end up paying less or more than the actual market price of the token. Let us look at some challenges faced by DEX users and operators.
DEX user Challenges:

1) Current DEXs are not capable of supporting a wide range of cryptocurrencies due to the lack of liquidity and interoperability.

2) DEXs lack intuitiveness and are more suitable for traders who have spent some time in the crypto space.

DEX Operator Challenges

1) DEXs with on-chain order books will have lots of data transactions to be recorded. Most of the leading DEXs like Uniswap are built on Ethereum. When the number of transactions increases, they tend to clog the Ethereum network and negatively affect the efficiency of the DEX.

2) Due to the increase in transaction load, the DEXs suffer from prolonged order matching time. As the order matching is automated, no human intervention can speed up things.

3) Liquidity is both technical and business challenges faced by the DEXs.

4) Due to trade collisions, the DEXs sometimes attract higher transaction fees.

5) DEXs generally do not support fiat.

What are the solutions?

Most of the DEXs are built on the Ethereum blockchain which limits the capabilities like order processing speed and transaction fees. The solution to this persisting problem is that the developers need to look for alternative blockchains like Binance Smart Chain or Polygon. These alternative blockchains have recently been in limelight for attracting DeFi users because these enable faster development of dApps. Also, both these platforms support interoperability between blockchains to create a better liquid market.

Wrap it up

At Antier Solutions, we are known for delivering white label cryptocurrency exchange software fortified with market-leading features that contribute to world-class performance. In addition, we are recognized for building a custom crypto exchange from scratch.

Schedule a free demo of our white label crypto exchange or connect with our subject matter experts to share your needs for a custom exchange built from the ground up.