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Why pure AMM DEXes might soon be replaced

The crypto industry has seen a lot of positive development in 2020, despite all the problems that this year has brought on a global level. Many new trends emerged and surged as the year went by, with the boom of the DeFi space definitely being the biggest one.

In fact, rather than being a year of COVID-19, the crypto industry considers 2020 to be the year of DeFi, as this sector finally managed to receive the attention it deserves.

 

The Rise of DeFi Affected DEXes

The DeFi (decentralized finance) sector has truly taken a life of its own, and it started developing in many different directions — all aimed at attracting users, providing services and use cases, and of course — making money.

One of the biggest and most popular trends of DeFi was AMM-based DEXes, or Auto Money Maker Decentralized Exchanges.

DEXes have been around for years now, and some thought them to be the future of crypto, as the centralized element of centralized exchanges does not make much sense in the crypto industry. However, DEXes had a big issue with liquidity.

Back when they first emerged, Ethereum saw a big surge in dApp usage, which increased the number of transactions on the network. With its inability to scale, Ethereum was not able to keep the gas fees low and handle all these transactions, which caused people to start avoiding Ethereum-based DEXes. These days, Ethereum is closing in on ETH 2.0, which will likely speed up the project considerably, but back then, this lack of scalability and speed was quite troublesome.

Eventually, DEXes lost their liquidity, and they ended up being just another passing trend.

That is, until recently, when Uniswap emerged and started attracting massive amounts of attention to DeFi, DEXes, and its own platform. Suddenly, everyone wanted to copy its technology, and share in its success, which is why an entire wave of AMM-based DEXes took over the crypto industry.

But, eventually, the hype started to pass, and people started seeing AMM pools for what they really are — just an attempt to bring back and save liquidity of DEXes. People chose to remain despite price slippage and losses that they saw, but there was never popular demand.

They simply decided to settle, as DEXes lacked the tech to scale transactions in a way that would allow them to support traditional orderbooks, which were capable of achieving much greater speed. The only issue is that there is no real point to decentralization if there is no transparency, and the use of traditional (off-chain) order books meant just that.

 

What is the Solution?

Faced with two possibilities — to risk transparency, or to risk speed — the DEX sector was backed into a corner, with developers across the crypto industry searching for a solution. So far, the closest that anyone has approached the best possible solution is Polkadex, which recently introduced its Fluid Switch Protocol (FSP).

Polkadex itself is a hybrid decentralized exchange, which uses an AMM pool to support its orderbook. In fact, this is a new, unique solution — the first of its kind.

The project itself notes that the solution is not perfect, although it is good enough to solve the issues that DEXes are facing, once implemented. If it works as suggested, it could be capable of securing near-boundless liquidity, provided that it is paired with an efficient trading engine.

Finding the right trading engine will be an entirely separate project in its own right. For now, however, let’s focus on FSP.

 

How Does it Work?

Basically, FSP is an order matching protocol, that goes between the orderbook and AMM. As such, it ensures that liquidity will keep flowing seamlessly for market makers and traders alike. This, in turn, provides guaranteed trades.

The AMM algorithm is uniquely programmed, and it can ensure that the orderbook is fully supported. As such, it can avoid the issues that other dexes have been facing, such as impermanent loss and price slippage.

This project could bring another chance to the DEXes and finally allow them to stand against centralized exchanges as equals. AMM pools would be able to solve the issue with liquidity, while pairing them with order books would create price swings and create arbitrage opportunities for those interested in taking them.

There is still room for innovations and improvements, and the solution is by no means perfect, as mentioned. However, it does open a new path for AMM DEXes to take, and potentially evolve along the way. The solution provides an opportunity for DEXes and DEX users alike, and as such, it is worth exploring.

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