Within the past year, around $70 million has been locked in the Synthetix DEX (Decentralized Exchange). Today, the exchange announced that their mobile app was discontinued so that the team could focus on other things.
Synthetix has sat atop the DeFi Pulse “value locked” list for quite some time, trailing closely behind Compound and Maker. Given recent hype around DeFi, it might seem strange that the DEX doesn’t find maintaining a mobile app worth while.
If you were one of the few viewers of the DeFi.WTF event at DevCon 5, the decision wouldn’t have been as much of a surprise.
Who uses decentralized exchanges?
Not many people.. that’s for sure. In the past 24 hours, Synthetix has done about $1.7 million in total volume while BitMex is at $1.6 billion.
Totle conducted research in June which resulted in a headline saying “DEX volume has tripled since January.” Still, June only held around 300 million in monthly DEX volume. Yet, the hype still lives, as YouTubers are saying that Ethereum’s DeFi will “spark the next bull run.”
At DevCon 5, even DeFi developers didn’t seem as excited as the YouTubers.
There was a lot of talk about the lack of volume and how to handle long tail assets. Long tail assets would be referring to niche products that don’t sell much. Lack of volume solidifies the fact that things aren’t selling.
Not many people are trading niche ERC-20 pairs, and they aren’t getting a discount on bigger tokens either. According to Tom Schmidt from 0x, aggregated exchanges are experiencing increased volume because people have wasted money by not checking prices.
Still on an aggregated (think Priceline) DEX such as dex.ag, someone who wants to trade USDC for Ether isn’t getting a better deal than they would on Coinbase.
Mobile apps are secondary for traders
Exchanges require more screen real estate to navigate than Instagram. Binance has a pretty solid mobile app, but most people still prefer the multi-monitor meta when it comes to planning and executing trades.
If a company is competing in a new and constantly evolving field, it makes sense to keep things lean and mean. A mobile version of anything is welcome in my book, but for those who manage large amounts of capital, doing work on their laptop is probably native anyways.
Looking at high percentage APR on margin DEX sites like DyDx and Fulcrum can be intimidating when you’re used to seeing .01% funding on BitMex. With a bit of high school level financial math, it becomes more apparent how competitive these exchanges can be for low leverage traders.
Why it isn’t that expensive
BitMex charges a .075% fee per transaction and .01% for “funding” every 8 hours unless price is extremely volatile. With a simple equation, we can calculate the APR that you would pay on Bitmex by longing Eth for more than 8 hours on a regular basis.
9.73% (fluctuates depending on Dai lending pool usage)
The biggest difference between BitMex and DyDx is that if you are a day trader, you might rarely pay the funding fee. On DyDx, interest is paid continuously, and you can see it draining your account in real time.
With that being said, you earn interest on your collateral (margin) just by having it on the exchange. DyDx uses Eth the same way that BitMex uses Bitcoin. No matter what pair you are trading, you put Eth up as collateral.
Though DyDx says that your collateral can earn more than the interest you are paying, Eth lenders only receive 0.07% supply side APR at the time of writing. The interest earned by holding Eth is very minimal especially during short term trades.
Shorting an Ethereum Dai Pair on DyDx will pay you continuously compounded interest. If it didn’t, it would be much easier to not recommend the platform. Still, funding can go in the negative on BitMex which means that longs are being paid. On DyDx, Dai interest will never go in the negative, which means you have to short be compensated.
To DEX or not to DEX
So if you are trading Eth, it mostly depends on how much leverage you would like to use. DyDx upped their 4x limit to 5x recently, but DEX margin is still nothing compared to BitMex’s 100x. Fulcrum exchange only offers 4x, but they are associated with bZx protocol, which claims that one “could” trade with up to 100x leverage on their network.
Fulcrum also offers wrapped Bitcoin derivatives, which is Bitcoin converted to an ERC20 compatible token. Since protocols and exchanges are built on the Ethereum network, Bitcoin needs to be in this format to travel from wallet to wallet. This is something that DyDx does not offer, but is planning on implementing in the future.
Another factor to consider is how important stop-losses and limit orders are to you. Neither of these features exist on Fulcrum, and DyDx only supports limit orders on their Dai/Eth pair.
Lastly, liquidity really isn’t great. Thankfully, DyDx will estimate slippage on your order, but it still isn’t great for moving large amounts of money.
Decentralized exchanges still have some work to do to become competitive, but they are getting better on a regular basis. DEXs might be the last hope for margin traders in the U.S. if BitMex or Deribit ever require KYC, so it’s good to see them getting more competitive.
U.S. regulators are focusing on making crypto margin trading less accessible to U.S. citizens. There are alternatives like Deribit who offer an identical perpetual swap contract but the exchange has less liquidity. On top of being illiquid, it is too similar in nature and therefore just as easy to regulate. If easy access comes to centrally provided leveraged trading in crypto, there’s only one clear alternative.
The state of crypto margin trading
Trading itself is risky, but adding 100x leverage to the equation lowers chances of success to an even greater extent. Nonetheless, blockchain is all about freedom and the ability to margin trade with a small investment is something unique to the crypto space.
The slow regulation of freedoms provided by the internet is reminiscent of how torrenting evolved. Bittorrent provided a new peer-to-peer protocol that was was different from Napster because people were exchanging links rather than actual files. New torrenting technology allowed people to continue downloading free music through Limewire and thepiratebay. By the time thepiratebay was hard to access, streaming unlimited music was affordable. Eventually there wasn’t as much of a demand to torrent.
Blurry lines of decentralization
In this situation, Napster to LimeWire is analogous with online exchanges to a decentralized exchange (DEX). Unfortunately, there are various aspects of an exchange that can be decentralized and filling a few of those criteria is enough for companies to market themselves as a DEX.
The founder of Binance himself, Changpeng Zhao, affirmed that his “DEX” platform is not fully decentralized in a tweet,
“A few guys seem to be bent out of shape, take it easy. Don’t call it a DEX. Call it an exchange where users control their own funds, runs on a fast blockchain maintained by a number of nodes, plus a fast and easy UI. That’s it.”
BNB to BTCB swaps are an example of how Binance DEX is not fully decentralized. BNB is Binance’s self minted coin and BTCB is their version of a BTC stable coin. Binance made their own version of Bitcoin since it is incompatible with their network and it is backed by your trust that they own as much BTC as they sell. In this exchange, Binance controls the order book and order matching in this exchange.
The decentralized margin trading solution
At its core, a DEX needs to have five characteristics:
Have an order book
Store zero data in a centralized location
Many decentralized exchanges have the first and second traits down. The most standard thing that a DEX will allow users to do is trade directly from their wallets. As we’ve learned, Binance fails in the rest of the criteria.
Where Binance fails, the 0x protocol steps in. 0x or ZRX is one of the few tradeable projects on Coinbase. The excitement of this project isn’t as much about the performance of the asset as it is it’s role in decentralized trading.
0x is a protocol built off of smart contracts on the Ethereum network that a DEX can build their exchange off of. Basically, it allows creators of a DEX to focus on the features they want to offer to the customers and takes the need for liquidity away.
This is how 0x works:
Trader market buys on dYdX
dYdX uses 0x protocol to find a seller from any exchange using 0x
Shared liquidity pool has potential to be more liquid compared to an independent DEX
Increased liquidity allows for higher leverage than independent DEX
Here, you can see how 0x has successfully provided liquidity in the past:
As a disclaimer, 0x is not always topping the DEX volume charts and has not been doing very well since August. Regardless, the idea of a shared order book allows for more variation in governance. Most DEX’s that use the 0x protocol do not list the ZRX token, which takes away the Binance network conflict of interest. 0x does not require or encourage users of their network to exchange via ZRX.
“If a CVC trading platform only provides a forum where buyers and sellers of CVC post their bids and offers (with or without automatic matching of counterparties), and the parties themselves settle any matched transactions through an outside venue (either through individual wallets or other wallets not hosted by the trading platform), the trading platform does not qualify as a money transmitter under FinCEN regulations.”
In essence, regulations do not effect sites assisting peer to peer transactions of currency. Exchange dYdX allows deposits of crypto onto the exchange, but that function of the exchange is vulnerable. If margin trading becomes accessible only via DEX, the cost of paying a gas fee for each transaction will be necessary.
Decentralized exchange costs more
There is no way of getting around the fact that on-chain transaction are slower and more costly than processing off-chain.
Let’s say you would like to long ethereum with makerdao’s dai coin on dYdX with 4x leverage. Compared to BitMex ETH to USD contract, there would be a .075% fee for the market order, and every 8 hours, there is a funding around .01%. Bitmex pays long contracts when funding favors buyers. Funding happens every 8 hours, but if you are in a long term position, funding can be in your favor and help balance the cost.
On dYdX, a DAI to ETH long with any kind of leverage can hit you with 14% APR depending on the time of the year. The interest is compounded continuously, so you will see it start piling up as soon as you enter your trade. On top of that, each time you deposit from your wallet to the exchange, there is a gas fee.
The Ethereum network charged me an $0.42 fee to move $11.49. While 3% is a high fee, the cost is relative to the amount you move. A thousand dollar transaction would have also had the same fee.
Centralized exchanges require gas fees to deposit and withdraw, but there are no gas fees for movement within. One of the main draws to using a DEX is that they do not hold any of your money.
Will it be worth it?
Much like trading itself, we can only analyze the trends. Currently, Google Trends displays a stagnant interest in the term “decentralized exchange.”
The success of decentralized trading depends on technology improving to compete with the speed and cost effectiveness of centralized exchanges. On the flip side, exchanges won’t have to be as complete as what traditional institutional traders are used to. Trading firms don’t occupy the crypto space because it is more difficult to make quick transactions on exchanges. Most of the volume on margin trading sites like BitMex come from independent traders. This means that a good DEX will only need to meet the needs of independent traders.
The most leverage any DEX will offer right now is 4x, which is likely due to the lack of liquidity in the space. A protocol similar to 0x called b0x, says on their website that with their protocol, you could trade with 100x leverage on Ethereum. Even so, the exchange that they advertise to use their protocol only offers 4x. Traders used to using 100x leverage on BitMex will want the same set of options to migrate organically.
Whenever speed, cost and feature sets of a DEX can compete with centralized exchanges is when adoption will speed up. The only alternative is if leveraged trading becomes even harder to access from the U.S. In that case, a number of traders will use the best alternative rather than quitting entirely. The most unregulated alternative to centralized margin trading at this time seems to lie within decentralized exchanges.