- DEXs hold promise, but CEXs and tradFi still dominate.
- Impairment loss and high price impact hurt DEXs.
- The latest DeFi technology can make DEXs competitive.
Decentralized Exchanges (DEXs) play a key role in the crypto space, promising a future where trading is trustless, transparent, and free of control by centralized entities. Yet, despite this, DEXs have not yet reached the position of their centralized counterparts. What is more, DEXs have not made a meaningful dent in traditional finance (tradFi).
To uncover why DEXs are still trailing centralized exchanges (CEX), we spoke to Kilian Krings, Founder and CEO of Stabble, a Solana-based decentralized finance (DeFi) platform working on fixing these issues. He revealed significant issues with DEX on the Solana blockchain and in general and also proposed ways to address these.
Advantages and Disadvantages of DEXs on Solana
Decentralized Finance (DeFi) holds significant promise, especially on Solana. Its network started dominating the DEX trading recently, thanks to a large interest in memecoins. Fresh memecoins are typically unavailable on CEX, they drive users to DEXs and present a unique opportunity for DeFi to show its strengths.
These strengths are many, according to Stabble CEO Krings, with DeFi holding several key advantages of DeFi over both tradFi and CEXs. Compared to tradFi, it offers “transparency, accessibility, and the ability to operate without intermediaries, which reduces costs and enhances security.”
When it comes to CEXs, its key advantage is “enhanced security and privacy by allowing users to retain control over their funds,” Krings stated. DEXs are also more transparent and censorship-resistant.
However, despite these advantages, DeFi also has some issues compared to alternatives. Before DEXs can compete with tradFi, they must “address issues like scalability, regulatory compliance, and user experience,” Krings pointed out.
“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 aspects, DEXs are also currently behind CEXs, Krings states. In addition to an inferior user experience and a long-time user complaint, many issues are technical. These hurt the bottom line for even the most experienced traders.
How To Fix Issues With DeFi Trading
“To attract more traders,” Krings explains, “DEXs need to improve liquidity management and capital efficiency, (and) reduce trading fees”. This is especially true for the DeFi traders, who often battle with impermanent loss and high price impact.
Impermanent loss happens when due to fluctuations in the token’s price after liquidity providers (LPs) deposit it in the liquidity pool. In certain situations, their price changes can cause them to earn less compared to simply holding the token. This discourages LPs from joining the pool and hurts liquidity in DeFi.
According to Krings, Stabble is fixing this issue through protocol-managed liquidity, a system which “dynamically allocates funds to the most profitable pools,” minimizing the risk of impermanent loss. Together with margin liquidity, Krings points out, this also boosts capital efficiency, giving LPs more returns on the same investment.
Stabble also uses a system to minimize the price impact of trades. Its “Smart Order Execution (SOE),” Krings explains, “splits large orders into smaller trades to minimize price impact.”
Still, DeFi still has a lot to innovate, and Krings expects several technologies to boost it even further. For instance, he expects “improved interoperability between different blockchains, enhanced privacy features” to likely impact DeFi in the future. He also sees a role for artificial intelligence (AI) in DeFi, especially for “predictive analytics and automated trading.”
These innovations position DeFi well to compete with tradFi and CEX platforms. This will especially benefit Solana, thanks to its scalability and a large DEX user base.
On the Flipside
- Solana faced criticism for its technical performance, including downtimes, and ongoing congestion.
- While DeFi offers enhanced rewards compared to tradFi instruments like stock trading, it also presents a larger risk for traders.
Why This Matters
By addressing impermanent loss and high price impact, Stabble’s innovations could significantly enhance the attractiveness and efficiency of DEXs. This will also improve the adoption of decentralized trading platforms.
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