The Evolution of DEXs
Hey Lydians!
We are back with another educational article on DeFi! This time we are going to look at DEXs/AMMs and how they have progressed over time.
The Need for Decentralization
In 2022 we have become quite spoiled with options for decentralized applications. The first exchanges that were available to users were all Centralized Exchanges. People quickly realized that this was a problem due to a lack of control of your own funds. Should an exchange get compromised then the user could lose their funds.
This is exactly what happened in 2014. The very famous exchange at the time, Mt. Gox, was hacked for 740,000 BTC! But that was just from its customers, the company itself lost around 100,000 of their own BTC as well. At the time it was worth around $460 Million USD. Mt. Gox was also the main exchange back then and accounted for 70% of all BTC transactions!
Around that time in January 2014 was when Ethereum was first formally announced to the world. One of the main issues that they wanted to solve was centralization. Through the use of smart contracts they knew that this problem could be solved. It was a rough start but we have made a tremendous amount of progress since then.
The First DEXs
The first DEXs around at that time were EtherEX and EtherDelta. I, myself, remember using EtherDelta back in the day and man was it a headache. The UX was not easy to navigate like the DEXs of today. It took a while before I got used to using it on my own without assistance from other people.
These earlier DEXs worked quite differently from what we use today. EtherEX was completely on chain and used a central limit order book (CLOB) design like many CEXs use. The issue with that was the fees. You had to pay a fee for every transaction and that included the market makers who often make 100x as many orders as executed trades. Another big issue was latency as the transactions had to be mined by the Ethereum Network before they would appear.
Then with EtherDelta they took the order book off chain. This was huge because to place orders was completely free from gas fees! So of course market makers are going to prefer this model. This also lead to lower latency for order creation which was huge. But unfortunately you still needed to pay gas to cancel the orders so this still wasn’t the best solution but regardless the infrastructure was improving very quickly.
Then, the next big DEX that hit the scene was IDEX. At the time I loved it, but I will admit it still was not the easiest to use. But with IDEX, they took the previous DEX design and made some great improvements. For one, the UI functioned better and was more intuitive. Secondly, they took execution off chain so that the user did not have to pay gas fees to cancel orders. Unfortunately there were still a lot of failed orders because if the user canceled or filled the order before you could sign your transaction then of course the order could not go through.
The Automated Market Maker
Most of us know that the first AMM to hit the scene was of course Uniswap. They perfected and simplified the UI for users and got rid of order books altogether. This also took out the need for market makers and made the whole process seem simple. This was huge as projects could simply supply their own liquidity on Uniswap and the trading could begin. It also gives users the possibility of adding liquidity to collect fees and or get yield from farms.
As of now this has evolved a bit into new AMM protocols like Uniswap v3, Bancor v3 and SushiSwap Trident. Some protocols also had the idea of reintroducing the CLOB system but just using a faster and cheaper chain since the issue was speed and fees.
DEXs have come a long way and have evolved to become more progressive and user friendly. Within our own ecosystem there are already a number of DEXs that fill a certain void. In the beginning there were 3 that paved the way on Avalanche. Initially, Pangolin and Lydia followed by Trader Joe which is currently the top DEX on Avalanche. Now, the ecosystem has seen the growth of many new DEXs. With time, DEXs will continue to grow and innovate for a better and even more intuitive experience. Within just a year, the notable DEXs on Avalanche have made huge improvements and it’s exciting to see what new progress will be made to the current and thriving exchanges that are available and what new and innovative DEX will enter the fray to help further the evolution of the DEX.
About Lydia Finance
Lydia Finance is an Automated Market Maker, Yield Farming, Staking, and Launchpad platform on Avalanche.
Their rich UI and comprehensive documentation/tutorials allow every level of user to invest in DeFi and maximize their earnings by taking advantage of Avalanche’s lightning-fast infrastructure with very low gas costs.
Trade, stake, pool, and earn $LYD and many other token utilities all on Lydia Finance.
