A survey of decentralized exchanges (DEXs) by blogger Marc Howard has shown that nearly one-fifth rely on the 0x protocol. This protocol can be used to trade Ethereum-based ERC-20 tokens and create liquidity pools.
Howard analyzed 258 exchanges, discarding several that did not have publicly disclosed protocols. His survey revealed that 0x was the basis for 19% of the 188 exchanges with a known protocol — giving 0x a far greater share than any other protocol.
As such, 0x may quickly become a driving force in the world of decentralized exchanges.
Solving Liquidity Problems
Decentralized exchanges allow users to maintain custody over their coins, providing an improvement over centralized exchanges which maintain control over their users and can even prevent them from accessing their funds.
Unfortunately, most DEXs face liquidity problems. Centralized exchanges have extensive reserves of cryptocurrency, while DEXs have very little in the way of reserves. This means DEXs have little liquidity, which makes trading relatively impractical for users. As CoinDesk explains:
“Liquidity refers to the extent to which a market allows assets to be bought and sold at stable prices. Lower liquidity tends to result in a more volatile market… and it causes prices to change more drastically.”
This is a major problem for decentralized exchanges. However, as Howard notes, the 0x protocol allows DEXs to combine their liquidity pools. Since 0x is currently leading the pack, it may quickly become the standard for liquidity pools that are shared between exchanges.
The Rise of DEX Aggregators
Howard predicts that 0x’s dominance will lead to the rise of a major DEX in 2019, and it may not be one that everyone is expecting. Leading centralized exchanges such as Binance and Bitfinex will soon launch their own decentralized exchanges, and these are widely expected to make a huge impact.
However, they may not be able to beat the combined powers of other DEXs. Howard argues that DEXs which aggregate other DEXs will take prominence. 0x’s widespread adoption will make it possible for DEXs to layer themselves on top of each other, essentially allowing a single DEX to encompass all of the others:
“Dexdex actually aggregates some of the orders of 0x relayers to add to its own virtual liquidity pool… Dexdex is like an aggregator of aggregators. Imagine being able to aggregate the liquidity of all DEXs. It’s not exactly a zero-sum game but an ever expanding pie.”
Howard notes that there will be challenges: effective marketing and user experiences will be necessary to beat Binance’s popularity and onboarding of existing users. He predicts that the most popular DEX will have “aggregate liquidity” and “a killer UX” on par with Coinbase.
He also admits that other DEX solutions such as atomic swaps may provide viable alternatives. Nevertheless, it certainly seems that the 0x protocol will spearhead the rise of decentralized exchanges.
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