The significance of decentralized trading for the growth of DeFi ecosystem
A decentralized exchange(DEX) offers Peer-to-Peer (P2P) trading of crypto assets. DEX is a crypto exchange that is similar to a centralized exchange but without taking custody of the tokens, users are always in control of the tokens. DEXs can facilitate the trading of any token without censorship or scrutiny.
DEXs are always the first point for users to test out the decentralized features of blockchains. So additional user growth on blockchains and defi protocols will come from users who have tried out the simple trading options through which they get a chance to familiarize themselves with the blockchain and the supporting ecosystem. Hence a highly liquid, low fee, easy to use DEX is an important part of the growth of any blockchain ecosystem.
Advantages of DEXs
- DEX provides the necessary liquidity for decentralized trading.
- A wide variety of tokens are available due to permissionless listing.
- Users remain in control of their funds.
- More secure than a centralized exchange due to its trustless nature.
- DEXs provide infrastructure for liquidations
- DEX with high TVL on assets creates stable markets which are not easy to manipulate.
At present, according to DeFillama (https://defillama.com/categories) there are around 359 DEXs across multiple blockchains with a TVL of 67.56 Billion out of the total 200 Billion locked on DeFi protocols. Around 30% of total capital is deployed on DEXs.
This is because DEXs form the base layer around which multiple DeFi products can be built.
DEXs form the base layer for innovation in DeFi
DEXs like Uniswap solved liquidity-related problems with AMMs (automated market makers). This led to a massive transition in the Etherum ecosystem. It helped attract users to join the decentralized finance (DeFi) space and contributed to its exponential growth.
Fragmented liquidity across multiple DEXs led to the rise of DEX aggregators notably — 1inch, Paraswap, Kyber & 0x. Innovative dApps started gaining traction led by money market projects like Maker DAO, Aave & Compound. Aave went further ahead with their offerings of uncollateralized borrowing of massive capital with the introduction of flash loans. With the advent of flash loans, there was an entirely new market created as it gave an opportunity to borrow large amount without any collateral. Arbitrageurs used this and took advantage of price variables on different DEXs to make profits.
This was a pivotal moment as competing projects thrived to provide the best UX & UI for its users which led to the influx of capital to DeFi protocols. These amazing dApps along with decentralized asset management tools fueled the growth of DeFi space by enhancing offerings on token prices, swap fees, reduced slippage, yield farming & high APY for lenders & borrowers.
Rise of gas fees
Such innovations require a large amount of capital and liquidity which is made possible by DEXs. But this led to high gas fees on the Ethereum mainnet and has made it impossible for regular users to perform simple transactions & retail users are completely priced out from making profits. Over the last 2 years the TVL dominance on ETH mainnet has reduced from 96.5 to 59.5%.
“Knowledge drives innovation, innovation drives productivity, productivity drives economic growth”- William Brody
More than 25% of all gas fees spent on Ethereum in 2021 was consumed by decentralized exchanges. For innovation and utility to gain momentum on Ethereum there is a need for gas-optimized dapps which not only cost less for transactions but also saves blockspace for other transactions to be validated. This is required at present as Ethereum aims to be the settlement layer for the entire blockchain ecosystem.
WhatSwap
Whatswap solves this as it is a highly gas efficient protocol which reduces fees compared to other AMMs without any trade offs to the user experience. The smart contracts are built from scratch and are lightweight for performing swaps, creating new liquidity pools and to add/remove liquidity.
WhatSwap is built to eliminate unnecessary functions which add no essential functionality or security specifically for trading. In essence, the users of Whatswap only pay for gas fees for features which they use. Compared to traditional DEXs, Whatswap saves the user’s gas fees on every transaction. The liquidity providers of Whatswap can earn trading fees by providing liquidity in the pool.
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