Decentralized exchanges (DEXes) have come a long way since their inception, revolutionizing the way users trade cryptocurrencies in a permissionless and peer-to-peer manner. In this NEW article, we will explore the evolution of DEXes, from their early days to the emergence of platform-specific DEXes, and the advent of multichain DEXes.
In 2016, the first generation of DEXes emerged, with platforms like IDEX, EtherDelta, and ForkDelta leading the way. These platforms allowed users to trade cryptocurrencies in a peer-to-peer manner, reducing the need for over-the-counter (OTC) groups and minimizing the need for trust. However, these first generation DEXes had their limitations, including slow and clunky user interfaces, limited liquidity, and partially centralized order books. Despite being non-custodial, some of these platforms were not fully decentralized and faced regulatory attacks, leading to the implementation of KYC and AML policies and IP blocking from specific regions.
In November 2018, the DEX landscape saw a significant shift with the introduction of the first popular AMMs, such as Uniswap. Uniswap changed the way people think about peer-to-peer trading by introducing the concept of decentralized liquidity pools and pricing curves. Users could deposit their assets into two-sided liquidity pools that used a mathematical formula, typically the constant product formula, to determine the relative value of each asset. This solved the liquidity problem and also helped price newer and more speculative assets efficiently, leading to the proliferation of ERC20 assets. The AMM model became widely popular, and today, most DEXes use this model, including popular ones like Pancakeswap for Binance Smart Chain, Spirit Swap for Phantom, and Pangolin for Avalanche.
In recent years, a new generation of platform-specific DEXes has emerged. These DEXes are purpose-built for a specific ecosystem and allow users within that ecosystem to trade a restricted range of assets. For example, Katana is an AMM built on the Ronin chain, specifically designed for Axie Infinity users to trade native assets like SLP and AXS, as well as generic assets like Ronin and USD coin. Similarly, XCadNetwork, a YouTube creator and fan engagement platform, is working on a platform-specific DEX for trading permissionless creator tokens against stablecoins, forming a closed trading environment for XCad users. Despite catering to a specific niche, platform-specific DEXes can still achieve significant trading volumes, as seen with Katana’s daily trading volume of over $100 million.
Most DEXes today operate on a single chain or have independent versions on multiple chains with no cross-chain trading capabilities. However, thanks to advances in cross-chain technologies like bridges and atomic swaps, the first generation of cross-chain DEXes have started to emerge. Examples of these include Atlas DEX, Swappery, SushiXSwap, and ThorSwap, which leverage a combination of bridges and decentralized liquidity pools to enable cross-chain swaps.
The evolution of DEXes has come a long way since their early days. From the first-generation DEXes that suffered from slow and clunky user interfaces to the emergence of automated market makers that revolutionized the liquidity and pricing dynamics of DEXes, and the rise of platform-specific DEXes catering to specific ecosystems, to the advent of multichain DEXes that enable cross-chain trading, DEXes have transformed the landscape of decentralized finance. Today’s DEXes are feature-packed, intuitive, and offer a wide range of functionalities beyond simple asset swaps. As the DeFi ecosystem continues to evolve, DEXes are more likely to play a crucial role in shaping the future of peer-to-peer trading and decentralized finance.