Why cross-chain interoperability matters for DeFi

With hundreds of cryptocurrency exchanges available for users to transact on, the question becomes centralized or decentralized, neither of which offers an efficient solution.

What is the next evolution for cryptocurrency exchanges?

The modern DEX is designed to take advantage of the benefits of both CEX and DEXs by leveraging innovative technologies to enable more efficient transactions.

Since limitations are presented for both the modern CEX and DEX, many propose that for widespread asset adoption, a non-custodial platform that supports assets across many networks is needed. In theory, this experience would enable users to control their funds at all times without giving up the flexibility of a promising user experience.

Polkadex has proposed this next exchange iteration as a decentralized peer-to-peer order book-based cryptocurrency exchange. The project aims to become the trading engine of Web3 by combining the advantages of CEXs and DEXs while eliminating the disadvantages of both.

To achieve this, Polkadex has tailored a solution based on cutting-edge trusted execution environment technology. This solution allows Polkadex to take custody out of the equation for exchange operators, therefore creating a non-custodial exchange that performs just as fast as, if not faster, than centralized exchanges.

Much like centralized exchanges, Polkadex aims to support assets from across chains, albeit in a decentralized manner. For this purpose, Polkadex is  not only developing THEA, a decentralized liquidity bridge that will first connect Ethereum (and other chains later on) to Polkadex, but it also recently won a Polkadot parachain slot which will allow it to connect to the wider Polkadot ecosystem.

Thanks to a community-driven campaign, Polkadex secured a win in auction 16 with a batch 3 record of 973,000 DOT loaned to its crowd loan. As a Substrate-based parachain, Polkadex will support assets from the whole Polkadot ecosystem, including its fellow parachains, while thanks to THEA, Polkadex will support assets from Ethereum first and other popular networks at a later date. This combination of interoperability layers will unite Ethereum, Polkadot, and, later, other blockchains under one decentralized trading roof.

By leveraging a model combining a layer-2 trusted execution environment, a parachain, and a cutting-edge decentralized liquidity bridge, Polkadex is making it possible to exchange assets from different blockchains while guaranteeing users themselves retain their own funds and smart contract keys. The exchange further provides supplementary offerings, including PolkaIDO, a fully decentralized and on-chain IDO launchpad, which will be seamlessly integrated with Polkadex Orderbook, Parachains and THEAs cross-chain bridges.

What are some of the disadvantages of decentralized exchanges?

Although operating as cryptocurrencies intended, decentralized exchanges (DEXs) often lack user experience, scalability and liquidity.

As a solution that exists separately from today’s intermediaries, decentralized exchanges have been known to offer lower liquidity, lack protection from front-running, a practice deemed as unfair, and with increased usage, have become subject to exorbitant network fees.

Considering that many of these factors are a result of DEXs being relatively new and, therefore, becoming subject to market segregation. The result is that in the case of less common trading pairs, users may become subject to orders that take some time to fill. Furthermore, since these exchanges are so early in development, those who have less familiarity with decentralized blockchain technology have often faced high barriers to entry to begin using them.

What are some of the advantages of decentralized exchanges?

Decentralized exchanges operate without a third party, making them non-custodial and verifiable by nature.

As their name states, decentralized exchanges (DEXs) operate without a central authority. Therefore, these exchanges will employ a smart contract that can self-execute under a set of conditions, recording all transactions directly to the blockchain. Since these exchanges do not hold a user’s funds directly, they are less likely to become a target for hackers. For the investor, this guarantees a certain measure of security.

Being decentralized by nature, traders will hold their wallets with their funds externally to the exchange, leaving them with greater control over their assets. Under this same model, users benefit from added anonymity since they will not need to abide by Know Your Customer (KYC) or Anti-Money Laundering (AML) procedures, as well as transparency and composability.

Why aren’t CEXs efficient in their current state?

Despite being more user-friendly, centralized exchanges defeat the purpose of the decentralized currencies they make available for users.

Although centralized exchanges have proven to offer many benefits to end-users, the beauty of blockchain technology is its ability to eliminate third parties. Unfortunately, among the most common trading methods available to users today, centralized exchanges rely on an intermediary, making them vulnerable to hacks and subject to high regulatory risks.

By design, these platforms typically operate off-chain, where they become escrow for cryptocurrency investors. Consequently, breaches of security and unsafe storage of information, funds and private keys are also common, among other concerns around custodial and privacy time-bombs.

What are some of the advantages of centralized exchanges?

Centralized exchanges are popular choices for cryptocurrency beginners.

Centralized exchanges (also called CEXs) are organizations that coordinate cryptocurrency trading on a large scale, often replicating the model set by a traditional stock exchange. Under this model, a CEX will participate in the market by “clearing” trades through an order book, which lists open buy and sell orders. These exchanges will also offer additional services, such as asset custody.

CEXs have become popular among cryptocurrency beginners due to the friendly and familiar way they enable users to invest in digital assets. Namely, as opposed to using a crypto wallet, users of centralized exchanges can log into their accounts as they would a traditional platform. Many of these platforms also provide benefits, including wide functionality in terms of advanced features like the provision of futures and derivatives and deep liquidity, which guarantees there is a buyer for every seller and vice versa.

What are the different methods to purchase cryptocurrencies?

When making a cryptocurrency purchase, users must decide between a broker, a digital asset exchange or a direct exchange with a seller.

Although there are several different methods to purchase cryptocurrencies, the most common question investors will ask is if they should use a broker or an exchange. Perhaps, the most common between the two is an exchange, more closely defined as a marketplace-like platform for buyers and sellers to unite in the trading of digital assets. Exchanges offer lower fees than a broker and have since improved the user experience to lower the barriers to entry for first-time traders.

However, as users go down the exchange route, they must make a further decision between a decentralized or centralized offering, where they will weigh factors such as asset availability, security and fees.