The way forward for DEXs: focusing on unique markets 🚨 This article is 5 years old...
The way forward for DEXs: focusing on unique markets
3 min read
Updated: Mar. 5, 2022 at 2:22 am UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
Competition in the crypto space is always intense but increasingly so when it comes to decentralised exchanges (DEX). Some of the bigger centralised exchanges have recently entered the game with Binance now running a DEX and Poloniex having just acquired TRXMarket, the largest DEX in the Tron ecosystem. Existing DEXs are leveling up with Radar Relay recently raising $10million from Blockchain Capital and Bancor announcing a 60,000 token airdrop to expand its liquidity pool.
With all that activity, it is inevitable that some DEXs can’t make the cut and eventually fold. But before we look into that, let’s briefly revisit how a DEX is different from a centralised exchange.
Centralised versus decentralised exchanges
Most of the crypto exchanges today are centralised — think Bitfinex, Bittrex, Poloniex and Binance. Consequently, most liquidity in the crypto market is on centralised exchanges because they are generally easy to use. The downside of that is that all the funds are held in a centralised place, making it an easy target for exchange hacks.
DEXs are generally less easy to use with lower liquidity, but superior in terms of security. On a DEX, there is no counterparty at the center of a trade. Instead, traders exchange assets directly between each other which means there is no middleman involved and the individual wallets of the traders talk directly to each other and exchange assets on the agreed price.
Individuals on the DEX have custody over their own funds, wallets and keys. There is no centralised authority that can stop you from trading or freeze your accounts. But if you lose access to your account or lose your keys, there is also no centralised party that can restore access. Much like in the real world, if you leave your wallet on a park bench and walk away, you’ve simply lost your wallet.
Speed is very important for exchanges because prices can change very quickly, so orders need to be completed promptly in order to capitalise on market opportunities. Which brings us to the performance of specific DEXs, their available markets and liquidity on those markets.
Liquidity is essential
In the last few weeks, you will no doubt have seen CryptoBridge closing down and OpenLedger temporarily suspending its operations as they are going through legal and technical consultations. These were sudden moves leaving many of their traders with questions gone unanswered — if it helps, both of these DEXs are gateways to BitShares just like Sparkdex is which means traders can login to Sparkdex with the same credentials to access their funds.
While these events have more to do with regulatory limitations in the jurisdictions where these DEXs are based, it certainly didn’t help their operations were already under severe strain. The first thing that comes to mind, is liquidity.
Low liquidity is often a major issue for DEXs which can lead to issues like price slippage, where the value of a currency changes over the period of time it takes to complete a trade. While most DEXs can boast superior transaction speeds, such as BitShares with tested transaction speeds at 3300 per second, this limits their ability to compete with centralised exchanges.
CryptoBridge, for example, held 126 trading pairs for mostly unknown coins with a reported daily turnover of $84,000. Since the ICO boom, smaller coins have simply lost a lot of momentum no longer driven by frenzied speculative trading. Trading niche coins on a DEX is simply not enough to secure your place in the market.
Trading unique stablecoin markets
Amidst all this, Bitspark’s decentralised exchange Sparkdex is still standing strong. Much of that has to do with the focus on stablecoins pegged to various national currencies. Next to USD, there are stablecoins tied to HKD, CNY, EUR, GBP, AUD, PHP, SGD with plans to add VND and IDR soon. Combined with BTC and ETH, there are currently 144 currency pairs. Some of these are entirely unique markets and can’t be traded elsewhere, like USD/PHP.
Almost every emerging market currency over time depreciates against the US dollar because USD is the global reserve currency, and the same goes for Philippine peso. You can validate this by looking at the exchange rate history over the last 40 years. On Sparkdex, this presents profitable shorting opportunities for advanced traders — something which is practically impossible through traditional forex brokerage accounts.
Liquidity on these markets is created by our market makers that see the opportunities before them. Market makers literally make markets for currency pairs. The goal of the market maker is to provide liquidity, tighten the spread across trading pairs, and encourage order book volume.
I’ve put together a learning course about trading decentralised and basic trading strategies, and if you want to learn more about market-making specifically you can join my upcoming live stream on 12 Dec 2019 where we go deeper into how this works and my experiences market making on the Sparkdex.
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Bitspark
In 2014, Bitspark was the first to send a cash in, cash out Bitcoin transfer between Hong Kong and the Philippines.
George is CEO and Co-Founder of Hong Kong-based Bitspark which makes crypto available to everyone by merging cash-based markets with the digital experience, and tailored solutions for each of the world’s 180+ fiat currencies.