Stages Of The Dex Development: How Did Decentralized Exchanges Emerge And Gain Popularity?

By Author: Peter Jennings
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The lack of financial infrastructure was one of the first problems that the crypto industry faced. Soon after the bitcoin popularization, it became clear that peer-to-peer exchanges on geek forums and chat rooms were a relic of the times.

The first centralized exchanges arrived as a solution. They operated using the principle of a “common wallet". This model means that all user assets are stored on one or several accounts, while it’s not actually assets that are traded on the website, but rather the rights to them. It was very convenient at the time, because it allowed to bypass a fairly significant blockchain fee.

However, cases of hacking and fraud increased with the popularization of cryptocurrencies, for which the first centralized exchanges appeared not ready. At the same time, the issue of creating decentralized platforms arose, where assets were not stored by its owners, but by each user in their own wallet during trading.

Birth of the DEX

Contrary to popular belief, the first DEX exchanges appeared not during the ICO Boom, but several years earlier. For example, the decentralized cryptocurrency ...
... trading platform, NXT Asset Exchange, opened back in 2014. Other similar projects entered the market later, including Counterparty DEX and Block DX.

However, they did not receive due attention either from investors or from a potential audience for the most part. This can be partly explained by the low level of technology, which made DEX platforms not quite convenient for ordinary users.

ICO Boom and popularization of the DEX platforms

Although many “buried” the idea of ​​decentralized finance and trading in 2014, the real popularity of the DEX platforms was yet to come. A huge number of new players entered the crypto industry in 2017–2018, including both individual enthusiasts and major tech firms.
This has led to the creation of many new projects and their native tokens. Subsequently, this stage in the industry development became known as the ICO Boom. Popular centralized exchanges could not address the challenge of the times back then. They have not been able to thoroughly study every project and coin that claimed to be listed. However, the DEX exchanges have.

The automatic custom listing technology emerged around the same time. With its help, users could independently add new traded tokens to the DEX exchanges. This allowed new projects to independently list their cryptocurrencies and satisfy the community's demand for their purchase.

Note. It is worth saying that the ICO Boom also became the “dark” times of the crypto industry. Many scammers entered the market under the guise of young startups at the time, due to which the industry attracted the attention of regulatory authorities and could even be banned at some point. Nevertheless, it was during the ICO Boom that well-known large DEX platforms emerged on the market, many of which are still popular.

However, it was the Automated Market Maker (AMM) technology that brought real popularity to the DEX exchanges. It fully replaced the usual order book with liquidity pools. On the one hand, they allowed investors and cryptocurrency holders to earn money on the “liquidity farm”. On the other hand, the speed of transaction processing and the availability of assets have increased with their help.

This technology was first applied at the Bancor website. However, UniSwap, which was created on the Ethereum blockchain, became the really famous exchange using AMM. It is fair to say that its development was supported by Vitalik Buterin (Ethereum founder), so success was just a matter of time.

The DEX-AMM model subsequently became the fundamental basis of the vast majority of decentralized exchanges. It was transferred to other blockchains later – for example, BNB-Chain (PancakeSwap) and Fantom (SpookySwap). DEX-AMM is also used in Solana, Cosmos, Terra, and a number of other ecosystems.

New generation of the DEX

Although DEX exchanges might seem to have reached perfection, new generation platforms are entering the market. ErgoDex, Chainflip, and Relictum DEX look the most promising among them, as of 2022. They not only meet the challenges of the time, but also offer their own unique solutions.

For example, ErgoDex is ready to offer its users to combine AMM and order books. This gives the project every chance to become not just a promising DEX exchange, but also a full-fledged platform for professional trading.

Chainflip is going to move away from wrapped tokens and vulnerable niche wallets. This will allow the website to work outside of one blockchain, and therefore have a large number of directions for exchange.

A special architecture of chains and blocks with a hash in MasterChain is the advantage of Relictum DEX. This feature allowed to expand the network throughput up to 1 mln transactions per second, while achieving unconditional scalability. In addition, the developers claim they are not going to charge a fee from users at the initial stages of the project development.

One way or another, the emergence of new projects on the DEX trading market proves that the industry still has room to grow, and young startups have things to offer users.