Last Wednesday, Coinbase, the largest digital currency exchange in the United States, went public and closed at $65.4 billion on its first day, surpassing China's largest brokerage, CITIC Securities. Since the launch of Bitcoin in 2009, in just over a decade, blockchain and digital currency have developed rapidly, and Bitcoin has undoubtedly become the category with the highest return on investment in the world today—from $0.1 to a maximum of $64,000. Of course, $64,000 is by no means its focus, it may just be a wonderful prologue.

With the prosperity of the digital currency market, digital currency exchanges that provide liquidity and transaction matching requirements for digital currency assets are also booming. Although Bitcoin was originally established for decentralization, for a long time, due to the difficulty of technical implementation and the high threshold for users to use, most people are still accustomed to trading digital currencies on centralized trading platforms. Centralized exchanges play a pivotal role in the digital currency market with a market value of tens of thousands and trillions. There are also many entrepreneurs who choose this track, and they have imperceptibly promoted the development of digital currency.

While the centralized exchanges are prosperous, they are also facing many problems, such as exchange volume, frequent encounters with hackers, government supervision and other problems, which make users lack trust in the centralized exchanges. (For example, events such as the theft of Mentougou in 2010, the hacking of Binance Exchange, and the inability to withdraw coins on OKex for a long time in 2020 are still regrettable).

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What is a decentralized exchange?

Decentralized exchange (DEX) is relative to centralized exchange (CEX). When users buy and sell digital currency in CEX, they need to charge digital currency or legal currency into the exchange, and the exchange will host their own currency. . The exchange also provides digital currency flow, conducts matching transactions, settlement and clearing and other processes. The listed Coinbase, OKEx, Binance, Huobi, etc. mentioned above are all well-known centralized exchanges.

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The development history of decentralized exchanges

According to the latest data from Debank, the transaction volume of decentralized exchanges in the past 24 hours has reached more than 5 billion US dollars. The number of DEX recorded by Debank is 35. In fact, it only records the DEX of the Ethereum chain and Binance Smart Chain. If Adding the DEXs of other chains in the market, the number is much larger than this data.

From the growth chart of the number of DEXs in the past, it can be seen that the development of DEXs has shown explosive growth almost since the middle of 2020, and before that, DEXs with an average daily trading volume of several thousand dollars are regarded as the top. For a long time, decentralized exchanges have been ridiculed as "false demand". From "false demand" to "just demand", what has DEX experienced?

The first "decentralized exchange" was the BitShares white paper. BitShares created an anchor currency and a DPoS consensus mechanism. BitShares has a built-in acceptor system. Through the acceptor gateway, legal currency can be exchanged for BitUSD (Bit USD) Or BitCNY (Bit Renminbi), and then trade on BitShares, which is a bit like some public chains now do cross-chain transactions. The innovative ideas of BitShares also received considerable attention that year. In a report in 2016, it was shown:

“Dominik Zynis, who was a WINGS consultant at the time, believes that there is currently no trusted cross-chain decentralized exchange. He said that the asset closest to this quality is only BitShares (BitShares).”

However, perhaps because of the imperfect infrastructure, BitShares' "decentralization" ambition has become transparent with the decline of this chain.

Yide is another decentralized exchange, which is a smart contract based on Ethereum, which can support various ERC20 token transactions on Ethereum. Users only need to generate a Metamask wallet account to easily realize the transaction. When Yide was at its best, its daily active users could reach 30,000 to 50,000, but later it declined due to various problems with user experience (not enough depth, unfriendly UI design, overly complicated product usage) and various security vulnerabilities.

Most of the decentralized exchanges such as ZRX-0x and KyberNetwork that appeared later have been improved, adopting the decentralized trading method of "on-chain + off-chain". 0x technically introduced the concept of Relayer (order relay), KyberNetwork introduces the concept of "reserve", which not only ensures that users' funds are stored in their own wallets, has control, improves the transparency and trust of transactions, but also ensures transaction liquidity and improves user experience. However, it is a bear market, and investors in digital currencies have become scarce, and such projects have not developed much.

In addition to these, Airswap, which dominated DEX in 2018, adopted a P2P negotiation model, that is, peer-to-peer price negotiations between buyers and sellers, and then the agreed orders are uploaded to the chain to complete the transaction through smart contracts.

The birth of Uniswap brought the dream of ETH founder Vitalik's paper: "Improving front running resistance of x*y=k market makers" into reality, allowing us to realize a decentralized exchange beyond the order book model Implementation method - exchange pool.

Decentralized exchanges of the exchange pool type mainly adopt an automatic market maker system, and trading users directly exchange currencies according to the current price, represented by Uniswap and Sushiswap. The constant product market maker model formula is very simple: x * y = k. Let the two virtual currencies to be traded be X and Y, and the respective quantities are x and y. The product x * y of the two currencies is always equal to k, and the value of k is determined by the first injection of liquidity.

If Uniswap opened the prelude to the prosperity of DEX, then the liquidity mining represented by Sushiswap has made DEX flourish, and DEX transactions have shown an exponential rise.

However, with the congestion of the Ethereum network and the sharp increase in Gas fees, the threshold for using DEX has gradually increased, and many people are discouraged from DEX, especially retail investors. Everyone finds that a transaction requires hundreds of thousands of fees to get rich. The incense used by centralized exchanges. Therefore, "CEFI" represented by HECO and BSC chains developed. It can be seen that the current 24-hour trading volume of PancakeSwap (a decentralized exchange on BSC) has surpassed Uniswap and Sushiswap, ranking first.

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What kind of DEX do we need in the future?

It is not difficult to find that DEX must be a trend, and the future DEX will definitely be more diverse than it is now, not only because multiple applications come from multiple chains, but also in various forms. In terms of use, DEX will become more and more convenient, reduce slippage, reduce handling fees, and improve user experience. Moreover, future DEX users must not only be users of products, but also creators of products, and the trend of decentralized self-organization will become more and more obvious. Ordinary users will gradually get used to using decentralized exchanges, just as they adapted to centralized exchanges.