- DEXs are also promising, but CEXs and tradFi still have the upper hand.
- Corruption losses and high price impacts have hit DEX.
- The latest DeFi technologies can make DEXs competitive.
Decentralized exchanges (DEXs) play a key role in the cryptocurrency space, promising a future where trading is trustless, transparent, and free from the control of centralized institutions. However, despite this, DEXs have not yet reached the level of centralized exchanges. Furthermore, DEXs have not had a meaningful impact on traditional finance (tradFi).
To understand why DEXs still lag behind centralized exchanges (CEXs), we spoke to Kilian Krings, founder and CEO of Stabble, a Solana-based decentralized finance (DeFi) platform that is working to solve these problems. He revealed significant issues with the Solana blockchain and DEXs in general, and suggested ways to solve them.
Pros and Cons of Solana’s DEX
Decentralized finance (DeFi) holds significant potential, especially on Solana. The network has recently started to dominate DEX trading thanks to the huge interest in memecoins. New memecoins are generally not available on CEXs, which presents a unique opportunity to drive users to DEXs and for DeFi to show its strengths.
According to Stabble CEO Krings, these strengths are many, and DeFi has several key advantages over tradFi and CEX. Compared to tradFi, it “offers transparency, accessibility, and the ability to operate without intermediaries, reducing costs and increasing security.”
For CEXs, the main advantage is that they “enhance security and privacy by giving users control over their funds,” Krings said. DEXs are also more transparent and censorship-resistant.
But despite these advantages, DeFi also has some challenges compared to alternatives. Before DEXs can compete with tradFi, “they need to solve issues like scalability, compliance, and user experience,” Krings noted.
“Currently, the complexity and volatility of DeFi can be barriers to mainstream adoption,” he explained. “Enhancing interoperability, improving security measures, and creating more user-friendly platforms are essential steps towards bridging this gap,” he added.
In some ways, DEXs are currently lagging behind CEXs, says Krings. In addition to poor user experience and long-standing user complaints, many of the issues are technical. These issues are hurting the profits of even the most experienced traders.
How to solve DeFi trading problems
“To attract more traders,” Krings explains, “DEXs need to improve liquidity management, capital efficiency, and (also) reduce trading fees.” This is especially true for DeFi traders, who often suffer from temporary losses and high price impacts.
Temporary losses occur when liquidity providers (LPs) deposit tokens into a liquidity pool and then the token price fluctuates. In certain situations, the price fluctuations may result in lower returns than holding the tokens. This prevents LPs from joining the pool and reduces the liquidity of DeFi.
According to Krings, Stable is solving this problem through protocol-managed liquidity, a system that “dynamically allocates funds to the most profitable pools” to minimize the risk of temporary losses. Krings points out that this, along with margin liquidity, increases capital efficiency, giving LPs more returns for the same investment.
Stabble also uses a system to minimize the price impact of trades. Krings explains that “Smart Order Execution (SOE)” “breaks up large orders into smaller trades to minimize the price impact.”
Still, DeFi has a lot of innovation to do, and Krings expects several technologies to drive it forward. For example, he expects “improved interoperability between different blockchains, enhanced privacy features” to impact DeFi in the future. He also sees a role for artificial intelligence (AI) in DeFi, particularly “predictive analytics and automated trading.”
These innovations will position DeFi well to compete with tradFi and CEX platforms, which will benefit Solana in particular due to its scalability and large DEX user base.
On the other side
- Solana got criticized Due to technical performance, including downtime and persistent congestion.
- DeFi offers higher rewards than transactional financial products such as stock trading, but it also carries greater risks for traders.
Why this matters
By addressing temporary losses and high price impacts, Stabble’s innovation can significantly improve the attractiveness and efficiency of DEXs. This will also improve the adoption of decentralized trading platforms.
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