LIQUIDITY AGGREGATION: ALL EXCHANGES IN ONE MARKET
Decentralized exchanges (DEX) have a number of advantages over centralized ones (CEX): increased security, stability, the autonomy of listing, a variety of traded coins. The key feature in trading on DEX is the preservation of full control of users over their crypto assets without the need to transfer private keys to the exchange.
Liquidity challenges
Since there is no single large trading platform on the cryptocurrency market, like the NYSE, NASDAQ, or the interbank Forex market, cryptocurrency exchanges may have problems with low liquidity. Liquidity is one of the most important indicators for any market, whether it is the commodity market, forex, or cryptocurrency market. High liquidity indicates a large number of transactions on the market and a high trading volume, where the difference between the maximum purchase price and the minimum sale price tends to a minimum. This situation is beneficial for all market participants since it allows you to make transactions at a price close to the market.
The problem of low liquidity can lead to order slippage with sharp price movements and high commissions for transactions. With low liquidity, the asset becomes weaker to highly volatile movements in the market, as a result, the probability of price manipulation increases.
Liquidity aggregation is designed to solve this problem. Liquidity aggregation is a system that combines quotes from several exchanges into one network and allows traders to make transactions at the most favorable prices. Also, the liquidity aggregator transfers orders from its system back to the liquidity providers, so it becomes a liquidity provider.
To sell or buy cryptocurrencies, the users have to register on a specific cryptocurrency exchange, provide their confidential data for passing the KYC procedure, and transfer access to their private keys to third parties. But what if the exchange rate for the coin is more favorable on another exchange than on the exchange where the user has registered? The user will have to repeat the same procedures on the new exchange, thereby further increasing the risk of theft of their personal data and private keys.
The decentralized exchange aggregator allows users to trade on multiple platforms simultaneously using a single account. At the same time, to trade on DEX aggregators, users do not need to go through the KYC procedure and send their confidential information to third parties. Decentralized aggregators are aimed at solving problems with low liquidity, ease of trading, and high commissions.
What are the advantages of aggregated liquidity?
- Aggregated liquidity allows you to reduce the size of the spread (the difference between the purchase and sale prices) and make transactions at the price closest to the market.
- Getting information about the prices of coins from several exchanges at the same time, allows you to make transactions at the best price on the market.
- The execution of orders does not slow down and does not slip, regardless of the volume of the transaction being made.
- The ability to open opposite orders to hedge risks. The decentralized aggregator allows traders to make transactions on different platforms using a single account.
- The distribution of a larger volume occurs evenly across all exchanges supported by the aggregator, which does not have a sharp impact on the price.
Thus, the overall volatility on the market is smoothed out and it becomes impossible to manipulate the market.
Sources of aggregated DEX liquidity
Not every DEX provides the benefits of aggregated liquidity. At the moment, the most popular DEX platforms on the cryptocurrency market are Uniswap, SushiSwap, PancakeSwap, 0x. But none of these exchanges provides aggregated liquidity, setting different prices for cryptocurrencies (thereby creating an arbitrage opportunity).
One of the most popular aggregated DEX is the 1inch platform. 1inch is a decentralized exchange aggregator created to combine all major DEX into a single system. 1inch allows its users to make transactions at the best prices, redirecting customer transactions between supported platforms using liquidity protocols. In certain cases, 1inch algorithms can even make several exchanges between different liquidity protocols to provide the best price.
1inch is an entire ecosystem of interconnected decentralized financial instruments (DeFi). The 1inch network provides its users with advanced functionality that allows them to access the capacity of DeFi. In addition, 1inch is not a custodial one, and all transactions are performed through connecting the user’s wallet to the platform without providing access to private keys.
All services provided by 1inch are accessible through a single user-friendly, intuitive interface, which allows users to understand how various DeFi services interact with each other.
As of July 2021, the 1inch platform provides users with access to more than 50 sources of liquidity on the Ethereum platform, 20 on the Binance Smart Chain, and 8 on Polygon. At the moment, 1inch is the only decentralized aggregator that supports Binance Smart Chain and Ethereum simultaneously.
Binance Smart Chain (BSC) is a new blockchain with a full-fledged environment for the development of high-performance decentralized applications. Its feature is the preservation of flexibility in terms of programmability, which is not typical for many other blockchains. BSC boasts the functionality of smart contracts and compatibility with the Ethereum Virtual Machine (EVM). Since the BSC network is compatible with EVM, it supports many Ethereum and dApps tools. BSC is optimized for fast trading and is designed to solve the limitations inherent in other blockchain systems, including the problem of scalability.
All the main 1inch trading protocols — Aggregation, Liquidity, and Governance — also support BSC. BSC has several advantages over the Ethereum blockchain. One of the main of them is a significantly lower amount of transaction fees, which makes all operations in this network more efficient.
Prospects for aggregated DEX
BSC is a modern and flexible blockchain with high throughput, which is rapidly gaining popularity, and more and more tokens are being launched on it. BSC is becoming the largest source of liquidity, along with the main Ethereum network, but at the moment only a few platforms support it.
Among the DEX aggregators that support BSC, we should highlight Newdex. On January 19, 2021, the Newdex platform was updated and switched from a decentralized exchange based on the order book to a model of a decentralized exchange aggregator.
Since the 2nd quarter of 2021, Newdex has been developing an aggregated multi-chain DEX, which will support liquidity on Ethereum platforms (including Layer 2), HECO, liquidity pools of the main swap services in the EOS network (Defibox, Defis Network, and others), including BSC.
Newdex will become an aggregator of decentralized exchanges with a large number of traded tokens and better liquidity and will become a single tool for decentralized multi-chain trading, providing its users with the best liquidity in the market. The Newdex aggregator will also support liquidity from such platforms as Uniswap, SushiSwap, PancakeSwap, 0X, Kyber Network, Balancer, Curve, Bancor, MDEX.
Newdex plans to develop a “virtual order book” function on ETH, which will be based on the total liquidity of swap services for better visualization of the blotter. Due to the high cost of GAS in the Ethereum network, the implementation of this function is unprofitable, so the developers are considering the possibility of implementing the “virtual order book” function based on ETH Layer2, HECO, or the basis of a proven BSC.
Trading on Newdex is completely decentralized and based on smart contracts, which means that users do not need to transfer their funds to the exchange and transfer access to private keys. To provide the best experience of decentralized trading, Newdex supports more than 20 wallets (TokenPocket, imToken, Bitpie, and others).
Newdex strives to take full advantage of DeFi tools, providing its users with the best experience of decentralized trading!
