Based on the recent developments in the decentralised finance (DeFi) sector, it seems the correlation between decentralised exchanges (DEXs) and automated market makers (AMMs) is all set to rise. It is believed that AMMs permit digital assets-based trading on the basis of reliance of liquidity pools over traditional buyers and sellers in a market, as it is considered unique to Ethereum and DeFi.
Insights from a report published by Chainalysis, a blockchain analysis firm, showed that between April, 2021, and April, 2022, Web3.0 users transferred on-chain value worth $224 million to DEXs, while $175 million was sent on-chain to centralised exchanges (CEXs). “The major role that DEXs and AMMs play in bringing DeFi to market is the decentralisation of all the trading activities. Decentralisation incentivises participation – people involved in the liquidity pool are entitled to receive fees and some interest rates, and this reduces third-party interference,” Yash Kanchan, director, NEAR India Hub, a layer-1 blockchain platform, told FE Blockchain.
According to investors and traders, DEX with AMM protocols are expected to receive traction from users, in terms of a rejuvenated interest in blockchain and distributed ledger technology (DLT). Insights from a research, titled “SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) protocols,” published by Jiahua Xu, Krzysztof Paruch, Simon Cousaert, and Yebo Feng, highlighted that AMMs employ a peer-to-pool method and determine asset price algorithmically through utilisation of a conservation function. Furthermore, AMM-based DEXs are expected to have helped with factors such as economics, security, privacy, among others.
“DEXs aim to solve issues that are faced by centralised exchanges including security, trust, trading fees, among others. The field of cryptocurrency is gaining traction with each passing day. While the blockchain-based costs right now aren’t exactly an ideal scenario for this development, chances are that this development is still bound to happen and reach a conclusion,” Punit Agarwal, founder and CEO, KoinX, a cryptocurrency taxation platform, mentioned.
Reportedly, Ethererum-based DEX Uniswap has already initiated its DeFi-backed practices, and is believed to have went through developments with regard to the DeFi ecosystem. Platforms such as SushiSwap, PancakeSwap, 1inch, among others, are also expected to inculcate DeFi-oriented developments, in terms of lending and borrowing, swapping tokens for another, entrepreneurs, developing communities, among others.
Moreover, it is believed that DEXs and AMMs have evolved in the past two years from swap to order book, from listing to launching projects through initial DEX offerings (IDOs), from cryptocurrencies to commodities trading, from spot trading to derivatives, among others. As per a report by CoinGecko, a cryptocurrency data site, trading ratio between DEXs and CEXs increased from 11.8% in December, CY21, to 12.8% at the end of Matrch, CY22.
“DeFi has the potential to revolutionise several sectors, including but not limited to healthcare, education, and supply chain management. All these sectors, that need to have a sense of transparency and trust, can benefit from the developments in DeFi. Fund managers can obtain liquidity for commoditised forms of less liquid asset classes. It also helps in the elimination of markets-oriented manipulative practices,” Edul Patel, Mudrex, a cryptocurrency investment platform, highlighted.