The aggregated trade volumes on decentralized exchanges skyrocketed from $70B in April to $130B in May. This sudden surge in trade volumes was partly driven by the current price rally and partly by the introduction of innovative DEXs. The demand to create crypto exchange platform that runs over highly efficient protocols is increasing day by day.
Let us take a look at which 4 types of decentralized exchanges (DEXs) are in demand:
1. Automated Market Maker (AMM) DEXs
Automated market makers based DEXs are driven by smart contracts. These smart contracts hold the liquidity pool in a paired fashion. This type of exchange gets liquidity from the liquidity providers (LPs) who deposit their assets to the pool.
The LPs are incentivized with the rewards like LP tokens and a percentage of the total trade fees for providing liquidity. The rewards are based on the kind of contribution they make to the liquidity pool. Such kind of DEX does not employ an order book. As a result, the trade simply occurs between the readily available pools and the price of the assets is determined by the algorithm of the AMM.
Some of the very popular AMM protocol-driven DEXs are Uniswap, Balancer, and Curve. The cost to start a crypto exchange based on AMMs is slightly higher than a centralized exchange.
2. Reserve System DEXs
The reserve system (RS) DEXs are functionally very similar to AMM DEXs. However, there is a small difference that sets both of them apart. An AMM DEX is algorithmically-driven and the price is automatically adjusted by the smart contracts. While this promises liquidity stability, it leaves a door open for market makers to manipulate the market. That’s because the AMM DEXs are generally prone to impermanent loss (IP) due to price fluctuation. This means when large transactions take place on the DEX, the slippage is very high.
To overcome this, Reserve Systems were introduced. The Reserves are various liquidity providers or market makers who support the ERC-20 standard. They have their own rules to control the prices of the assets. Because of this, they can enable risk management. For example, they help set low slippage when the transaction is large.
3. Peer-To-Peer DEXs
This is also known as an order-matching system because it allows counterparties to trade in a peer-to-peer fashion. The counterparties can conduct the trade directly from their wallets. Some of the popular P2P DEX setups are:
• Atomic Swaps
Without the need for an intermediary, the Atomic swaps DEXs connect the counterparties in a way that the trade is either completed entirely or not at all. While these trades are conducted on-chain between the wallets of the counterparties in a trustless manner, they protect the assets of both parties.
Some of the recent and leading Atomic DEXs are designed to work as a non-custodial, permissionless platform. These enable on-chain settlement, and user and order book with the market to settle the trade.
• Subatomic swaps
While an Atomic DEX only enables the transfer of value, a subatomic DEX enables the transfer of files like a video file in a trustless manner. Also, the subatomic DEXs can be designed to execute a trade in multiple swaps. For example, if a trader wants to sell crypto assets worth $50, he can use the DEX to automatically perform 50 transactions of $1 each to mitigate any kind of risk.
While the Atomic DEX settles the trades on-chain, the off-chain DEX keeps the order book away from the main blockchain. This approach ensures that the orders are matched off-chain and the settlement is completed on-chain, leading to faster settlement times.
4. Parallel Processing DEXs
This kind of DEX is generally built on an UTXO-based blockchain. The traders use smart contracts to carry out the trades but it is nothing like an AMM. Both the LPs and users of this kind of DEX use the multi-reserve currency to carry out the trade or provide liquidity.
A multi-reserve currency is a based reserve. It is used as a liquidity pool also. One of the major benefits of this kind of model is that while AMMs process the transactions in a sequence, the Parallel processing DEXs process multiple transactions simultaneously. This is because multiple transactions are placed in a block and then sent for processing. While it enhances the transaction speed, it mitigates the risk, enables efficient use of liquidity and fair market pricing of pooled assets.
Wrapping it up
Creating a crypto exchange platform that delivers high-performance, top-notch security,y and trustless environment to users requires both experience and expertise. We, at Antier Solutions, strive hard to build highly secure and performant crypto exchanges that offer a flawless trading experience to the users.