Nova Research Institute | Dex Special Research

1. The ecological map of the encrypted world      


Before entering DEX, it is worth understanding the current Dapp ecology in the crypto world. As a hard core element of the crypto world, Dapp (decentralized application) is an area that blockchain practitioners vigorously explore. On the current three major public chains: Ethereum, EOS and TRON, Dapps are mainly divided into 8 types: gambling, games, and transactions. As shown in Figure 1, from the perspective of the total underlying chain, the top 3 Dapps are gambling, games, and high-risk categories, while there are 207 Dapps in the transaction category (DEX), accounting for 6%. From the comparison of the underlying chain, thanks to the huge developer community and first-mover advantage, Ethereum has the richest ecology, with a proportion of 60%.




Figure 1: Dapp distribution of each underlying chain Data source:


Specific to the field of encrypted asset exchanges (trading platforms), according to the degree of centralization, there can be three forms of centralized exchanges, decentralized exchanges and wallets. The following figure shows the most representative platforms among various types to help understand the distribution of exchanges.




Figure 2: Distribution of crypto exchanges



2. Decentralized Exchange (DEX)




1) DEX type
Specific to the research object DEX of this report, we first start with the core knowledge points of DEX, including DEX types and technical principles. According to different trading modes, the DEX currently on the market can be roughly divided into the following three categories.
01) Order book hosting mode
The transaction is carried out in the form of an order book. According to whether the transaction is confirmed on the blockchain when the transaction is settled, it can be divided into an on-chain order book and an off-chain order book.
a) Order book on the chain
  • General process: Maker (seller) fills in the order request, signs it with a private key, and submits it to the blockchain for lock. Taker (buyer) selects the order that he wants to trade from the on-chain order book, initiates a transaction, and then the smart contract Match the transaction needs of Maker and Taker, and settle on the chain after the transaction is successful

  • Typical example: Early decentralized exchange EtherDelta based on Ethereum (now closed)

  • Advantages and disadvantages: Since the entire process of recharging, placing orders, matching, settlement, and withdrawal of each transaction is completed by smart contracts, and settlement is confirmed on the chain, this type of DEX transaction has the highest transparency and security. However, because the entire process is on the chain, and the current underlying technology of the blockchain still has bottlenecks, it is difficult for this type of DEX to avoid problems such as slow transaction speed, poor transaction depth, high transaction costs, and poor user experience.


          b) Off-chain order book
  • General process: The DEX of the on-chain order book model enhances transaction transparency and security, while sacrificing transaction speed and asset liquidity, and also brings higher transaction costs. In response to this problem, some DEXs have optimized the process on the chain, choosing to put only the final transaction order and settlement process on the chain, while others are processed off-chain, thereby improving transaction speed and user experience
  • Typical example: Take the decentralized exchange 0x based on Ethereum as an example. It uses state channels to select off-chain matching, on-chain settlement, and introduces the role of Relayer (order relay), which is responsible for off-chain orders Collection, matching and submission on the chain
  • Advantages and disadvantages: to a large extent, reduce transaction friction and speed up settlement, but the disadvantage is that some decentralized features are sacrificed
02) Reserve pool mode
  • Rough process: Compared with the order book model, the DEX of the reserve model does not have an order book, but a reserve pool (Reserves) to provide reserves, which can be quickly cleared and settled through smart contracts. In this mode, it is not that a seller must find a buyer to trade, but can maintain the liquidity of the transaction through the reserve pool

  • Typical example: Kyber Network, Bancor and Uniswap are typical of this type of DEX. They all have the concept of reserve pool/liquid pool. The difference is that the quotations on Kyber Network are continuously updated by reserve managers, while Bancor and Uniswap have The design of automatic market maker, through the equation (reflecting the relationship between supply and demand) to get the buying and selling price

  • Advantages and disadvantages: investors' trading needs can be quickly met without counterparties, which is suitable for solving the problem of long-tail market liquidity. The disadvantage lies in the need for reserve contributors and reserve managers to have a certain amount of start-up capital, and a strong operational drive is required

03) P2P mode
  • Rough process: DEX in P2P mode has the simplest realization principle, that is, the two parties of the transaction negotiate the price point-to-point off-chain, and then put the agreed order on the chain, and complete the transaction through smart contract, which is more similar to an over-the-counter transaction
  • Typical example: AirSwap is a typical example of this type of DEX. It is developed based on Ethereum and introduces two roles: Indexer (relay) and Oracle (oracles), which are responsible for matching transaction parties and providing quotes.
  • Advantages and disadvantages: P2P DEX best meets the definition of "decentralization", but the asset liquidity is poor and there is greater trading friction

2) Introduction to DEX project

The following table selects the information of 8 active DEX to help understand the basic situation of typical projects.




Figure 3: The basic information of DEX


3)  DEX VS. CEX 

What advantages does DEX have over CEX and what deficiencies it faces? We will compare the two in detail from the dimensions of security, currency listing, transaction liquidity, fee rates, operating thresholds, and user experience.




Figure 4: DEX vs. CEX


01) CEX

  • Core advantages: efficient trading, convenient operation, high liquidity

  • Key risks/disadvantages: facing huge risks of internal fraud and external hacker attacks, which are reflected in:

    • There is a large amount of user information, including personal identities and fund transactions, and privacy leakage may occur

    • Asset keys are not in the hands of users. Centralized exchanges are similar to "trading platforms + banks" and are easy targets for hackers

    • The transaction process is not chained, and only the process of user funds flowing into the exchange and out of the exchange to the user's address can be chained. It may happen that the exchange guards theft, embezzles user funds, and manipulates prices. In the figure below, we do not fully count the major security incidents that have occurred on CEX and DEX in history. It can be seen that the number of safe time records on CEX far exceeds that of DEX, and the financial losses involved are often very high. Of course, DEX is not absolutely secure and faces the risk of technical vulnerabilities




  • Figure 5: Security incidents related to crypto exchanges


  • 02)DEX
  • Core advantage: The user has control over the wallet/private key, and has a high degree of security without leakage, loss or forgetting

  • Key risks/disadvantages

    • Once the user leaks, loses or forgets the private key and mnemonic phrase (or Ketstore file), the asset will not be recovered

    • Poor user trading experience: cumbersome trading process, poor trading performance, low matching efficiency, and lack of liquidity are the dilemmas faced by most DEXs. In addition to the performance constraints of the underlying network, it is mainly because DEX lacks a user base and market maker. Figure 6 shows the transaction volume and traffic data of the past 24 hours on the reporting day. It can be seen that the current status of mainstream DEX is far from comparable to mainstream CEX. At the reporting date, Top10 DEX's 24h trading volume was 2.3% of Top 10 CEX's, and monthly visitors accounted for only 1.7%. Note: CEX selects Top10 exchanges with a confidence level >=8 according to the official data, so there is a certain error




  • Figure 6: Transaction volume and traffic ranking of each platform, data source: Coingecko


  • Trading currencies are limited: As the current cross-chain technology is still in the development bottleneck, the current DEX support for cross-chain assets is still very limited. For example, the DEX developed based on Ethereum mainly trades ERC20 tokens. Figure 7 shows the online status of some DEX tokens. On the other hand, DEX lacks a complete and strict listing review mechanism, the threshold for listing is low, and the quality of projects varies. In terms of trading currencies, the advantage of DEX is that it can support some niche currencies and provide liquidity in the long tail market.




  • Figure 7: Currency support of DEX, data source: Coingecko



    4) Data comparison between DEX

    Due to the highest data support of the Ethernet DEX, this part mainly focuses on this type of DEX, and compares and analyzes the development status of DEX from the two dimensions of transaction volume and number of traders. As shown in Figure 8, we have counted the transaction volume data of 11 mainstream DEX platforms on Ethereum since the beginning of 2020. It can be seen that the average weekly trading volume for 2019 and the beginning of 2020 is US$46 million and US$300 million respectively, an increase of about 6 times. Since the beginning of this year, the weekly value has been significantly higher (or close to) the 2019 average. It can be said that DEX has developed a lot this year.

    From the comparison between platforms, the top 5 DEXs ranked by volume last year were: IDEX, Oasis, Kyber, Uniswap, and 0x. This year, the ranking changes to: Curve, Uniswap, dYdX, Kyber, and 0x, especially Curve It has shown explosive growth since June. In terms of the number of transactions, the total active users of DEX are mostly between 3,000 and 8,000, and the fluctuations are small except for individual times.




    Figure 8: The transaction volume and number of active users of Ethereum DEX


    Data source: Dune Analytics, Dapptotal




    3. Opportunities to focus on in the future




    1) Platform currency 

    Platform currency generally refers to platform tokens issued by trading platforms, and most of them have two attributes: equity and utility. In the figure below, we have counted the currency price performance of several CEX and DEX platform currencies in the past year. The two currencies with the best returns during the period are KNC (+635%) and OKB (+183%). , DEX ranked from high to low, they are: KNC (+635), BNT (+117%), ZRX (+37%) and IDEX (+3.6%), the difference is large. The strong performance of KNC may be related to the Katalyst upgrade this year and the rich economic model.




    Figure 9: Platform currency price trend, data source: Coingecko


    From the perspective of the circulating market value, the total market value of the 7 platform coins reached two peaks in mid-2019 and February this year. The 4 DEX platform coins accounted for 2% to 13%, the latter since May this year The growth has been very obvious since. As of the reporting date, the circulating market value of the four DEX platform coins ranked from high to low: KNC (289 million U.S. dollars), ZRX (286 million U.S. dollars), BNT (104 million U.S. dollars) and IDEX (29 million U.S. dollars). Based on the distribution of trading volume in this year in Figure 8, the market value of the 4 tokens may be mismatched to some extent, and investors can pay attention to trading opportunities.




    Figure 10: Market value of platform currency in circulation, data source: Coingecko


    02) Impact on the underlying chain

    As an important part of the Ethereum Dapp ecosystem, DEX can be classified as Defi (decentralized finance), which should affect the performance of ETH to a certain extent. The chart below shows the trend of ETH price and monthly DEX volume since January 2019. It can be found that the ups and downs of the two are basically the same, and the correlation coefficients in 2019 and 2020 are 0.91 (strong correlation) and 0.63, respectively. When evaluating the development prospects or fundamentals of the underlying chain, DEX should be a link that cannot be ignored.




    Figure 11: ETH price and DEX volume trend, data source: Dune Analytics


    3) The future outlook of DEX
    Summarizing the above, we discussed the dilemmas and deficiencies faced by DEX in the current development stage of blockchain technology. From the short-term data point of view, DEX seems to be only a supplement to CEX, and its market share is relatively small. In the medium and long term, with the advancement of underlying technologies, such as the improvement of public chain performance and the breakthrough of cross-chain technology, as well as the growth of user groups, we have reason to believe that DEX has huge room for development, and is extremely An important part. In recent years, the top three CEX exchanges have deployed DEX, which also reflects the development potential of this field. Decentralization is the hard core element of the blockchain, and transactions are the most active part of the crypto world. In the future, we will continue to pay close attention to the development of DEX.
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