In the ever-changing landscape of DeFi, ideas and trends come and go, historical key moments, however, are essential in enabling us to overcome stalemates. This is largely because things that don’t work in the present might be relevant in the future, or the demand may simply not exist yet. Besides, adoption always takes place when least expected. That being said, we believe that the landscape of DEX is at the brink of a new revolution, let us take a step back and explore how the DEX landscape has evolved to understand the new revolution we’re talking about.
Decentralized Exchange in 2016–17:
This one is for the OGs. Some of you may remember in the era when AMM does not exist yet, there are several DEX pioneers such as EtherDelta and IDEX. While there are certainly limitations and drawbacks, they made significant advancements. Firstly, peer-to-peer trading. The platforms listed above allow users to directly trade cryptocurrencies without a middleman. Secondly, a trustless system. Instead of trusting your crypto with a third party, users retain full custody of their assets.
Moving on to the limitations, one of the critical factors for a successful exchange is liquidity, which ensures that there are enough buyers and sellers to facilitate smooth trading. In the early stages, DEXs faced challenges in attracting a significant volume of users and achieving sufficient liquidity. Besides, the user interfaces of early DEXs were often clunky and unintuitive, and this usability barrier made it difficult for mainstream users to adopt DEXs.
✅ No need for KYC
❎ Poor UI/UX
❎ Limited Liquidity
The rise of AMM & Uniswap in the 2018–20
This era is when the term ‘code is law’ is popularised. The concept of an Automated Market Maker (AMM) took off, including the most renowned DeFi project Uniswap. AMM enables traders to execute asset trades using algorithmic-based computer code. It establishes a supply and demand framework driven by algorithms that operate on top of a liquidity pool. Furthermore, the challenge of restricted liquidity in the first era has been effectively addressed as these pools also provide an attractive incentive for liquidity providers to contribute.
AMM is not without its drawbacks. Common issues such as high slippage and impermanent loss would also occur due to the highly volatile market causing prices to fluctuate. To summarise, the 2 reasons stated above could be the reasons that make it difficult for DEX to scale.
❎ Slippage and Impermanent loss
The Layer-2 DEX Landscape in 2021 and the Narrative of AMM vs CLOB
Remember during the Bull Market in 2021, when Ethereum Gas Fees are over the roof? Protocols in the DEX landscape are finding solutions to handle high trading volumes, and they all came to the same solution: Layer 2s. In this era, you will see more and more DEX being deployed in Layer-2.
During that time, Arbitrum and Optimism are two of the well-known layer 2s that are often compared to Ethereum. Ever since then, we witnesses the outbreak of Layer 2 in 2021, the market scale of DEX overgrew, and the market competition pattern became increasingly fierce.
Besides making DEX accessible and cheap via Layer-2s, another narrative that emerged is the introduction of the Central Limit Order Book (CLOB). CLOBs have always been in traditional finance for decades, but why are they relevant now and not before? The requirement for CLOBs to work efficiently needs a lot more transactions than AMMs, and no one could possibly imagine it happening in crypto where costs are high and settlement is slow. But with the high throughput of layer-2s making transactions quicker and cheaper, the narrative stands.
As we discussed the issue of slippage and impermanent loss, CLOBs rectifies the problem. To put it simply, CLOBs are made up of orders where people define their own price in a buy-and-sell market. Let’s say you want to buy ETH at a certain price, you would place a limit order and let it sit in the order book until someone matches your bid. Unlike in AMM, what you see in your trade is what you get, hence there is no slippage. Besides that, impermanent loss can be avoided as liquidity providers have the ability to determine the trading price for an asset pair based on their fragmented liquidity position.
✅ Cheap Gas Fees
✅ High Throughput
✅ CLOB solving Slippage and Impermanent loss
2022: The Rise of Derivatives in DEX; The Beginning of CEX Crisis
It is far too early to announce the endgame of DEX, as they are constantly in the race to eliminate the drawbacks of AMM and compete with other DEXs, not to mention the centralised counterparts. As mentioned above, one key aspect that DEX is truly lacking from CEX is the presence of derivatives, one of the key features that helps target retailers and investors.
As so, the market responded, and many derivatives protocols subsequently emerge. Notable derivative projects flourish such as dYdX with over 85% of on-chain perpetual volume, and GMX, the project which overtook dYdX’s place to be the largest derivatives DEX by total value locked (TVL).
Ultimately, the derivatives market is still quite young, but it does open up options for more advanced trading options like derivatives that could rival CEXs in user experience while maintaining the benefits of the composability of blockchains. But that’s about to change after the FTX crisis…
The FTX crisis
Things taken for granted will eventually be taken away. The fall of FTX reminds people of the importance of decentralisation and ownership of assets. DeFi activity on Ethereum soared as details about FTX’s insolvency. Daily trade volume across DEXs quadrupled in size over four days from November 7- 11 2022. To summarize, as DEX slowly incorporates features that had made CEX successful, such as the incorporation of Derivatives, there might be a time when DEX could take over CEX as the leading market in Web3.
✅ The emergence of Derivatives Market
✅ Narrative Shift from CEX to DEX
2023: The Future of DEXs and Sat.is
What lies ahead for the future? It’s just one word: Usability. The next revolution for decentralized DEXs will revolve around enhancing usability. Going through the timeline developments, we started as the cool kids with decentralized peer-to-peer transactions and AMMs, to eventually work on scalability solutions for DEXs and slowly integrate into the mainstream.
The Sat.is team is ready to embrace the future of DEX usability. We represent the next generation of Order Book DEX, built on the zkSync Era — an advanced zk rollup and Layer-2 scaling solution for Ethereum. Our focus lies in implementing the most intuitive and user-friendly derivatives trading experience (UX) available in the market. Our goal is to make DEX more accessible to a wider audience. Worry about slippage and impermanent loss? We utilize the CLOB setup with seamless execution. Want to make DEX more accessible? We built it on both L1 and L2 and feature our Remote Trading function. Do we need to onboard more traders? Let’s work on advanced order types and expand the derivatives market. CEX is losing user confidence? We start the next revolution while embracing self-custody of funds.
Time has changed, Users can now choose the platform they want to be in Web3, but that takes bravery and determination to be different and go against the norm. Anons, we are here for you. Our name Sat.is originates from Satis, the Egyptian Goddess of fertility, hunting, and war, we venture forth to nurture more users, hunt for profit, and fight for ownership and freedom in Web3!
The Mainnet Alpha launch represents a significant milestone in our journey. Building upon your feedback and expertise, we have built Sat.is — The Revolutionary Order Book DEX which features concentrated liquidity, provides seamless execution and self-custody for traders.
Stay tuned for our Mainnet Alpha launch!
Feel free to contact us at: firstname.lastname@example.org