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DEX,exclusive - 03.06.2021

DEX on Tezos Today and Tomorrow

In this Tezos DEX review, we look at the present day but think about tomorrow.

There have not been DEXs on Tezos until recently, yet the data we have is sufficient to make certain conclusions. To that end, we compared the functionality of Tezos’s first DEXs, Dexter and Quipuswap.

Dexter are Quipuswap decentralized exchanges using standard AMM mechanics. Liquidity providers offer their tokens to AMM pools while traders use this liquidity for the purpose of exchange. Still, those two are far from similar.

FA1.2. vs FA2

The key difference is that Dexter works only with FA1.2 tokens, while Quipuswap works with both FA1.2 and FA2. Right now, FA2 is the standard for Tezos tokens, so new tokens cannot be added to Dexter’s liquidity pools.

Future DEXs on Tezos should focus on FA2 and keep their finger on the developments in this area like tickets. They are not only a new way to represent and transfer assets, but also are a permission governance method that eventually means fee-free transactions for users.

Creating Liquidity Pools

Quipuswap allows for the free creation of liquidity pools, which Dexter sadly lacks. There, you can only add liquidity to pre-existing pools added by the exchange’s devs.

Certainly, creating liquidity pools for any tokens is a must. Nonetheless, this freedom gives a leeway to scammers effectively enabling them to launch pools with cloned tokens. There is a possible solution, though: DEX adds the option of whitelisting tokens developed by community members. Therefore, users don’t have to check every single token if he or she trusts the author of the whitelist used.

Liquidity

This spring, the overall value of assets in Dexter’s liquidity pools reached $1.9m but it plummeted on May 14. Meanwhile, there is $9m in Quipuswap’s liquidity pools, and the liquidity skyrocketed a couple of days before Dexter’s liquidity decrease, on May 12 and 13.

As of May 31, Quipuswap’s overall liquidity and daily turnover were 40 times as much as those of Dexter: $6.639m of liquidity vs $0.151m, and $0.775m of daily turnover vs $0.016m.

Still, while the positive dynamics look great, the overall amount of assets in liquidity pools and the daily turnover on Tezos’s AMM DEXs remains relatively insignificant. In the future, those parameters are likely to grow thanks to the launch of new projects on Tezos as well as solutions like Wrap Protocol. Right now, however, there are enough tez in liquidity pools to make bakers compete for the stake.

Baking

DeFi on Tezos is quite different from that on PoW blockchains: tez deposited in DeFi apps can be staked. In the case of DEX, it is about tez in liquidity pools. Those tez can be delegated to bakers and offer supplementary profits in the form of a tez issuance share.

Liquidity providers on Dexter don’t have an option to choose a baker to delegate tez from their pool: the choice is made by the dev team. In Quipuswap, liquidity providers of each pool vote for the baker to whom they will delegate tez from the pool.

As the tez amount in liquidity pools grows, the competition of bakers for those pools will grow fiercer. Even now there is the case of the pool called CRUNCH, which has become the biggest liquidity pool on Quipuswap after receiving 100% of the funds raised during the CRUNCH pre-sale.

The funds raised by Crunchy were locked by the team in the pool but they never voted for the pool’s baker. This enabled other liquidity providers of Crunch to decide whom they are going to delegate those funds to even though they had a minor share in the pool. There’s no surprise that a baker becomes a liquidity provider for the pool in order to vote for delegating tez to themselves and exercise their veto to keep other bakers away.

Governance Token

Neither exchange has governance tokens though it’s likely that such tokens will be launched sometime in the future. Such tokens will transfer the governance from developers to a DAO and make the app’s users its owners. The distribution of governance tokens of a DEX amongst liquidity providers creates an additional incentive to provide liquidity which is likely to increase the liquidity of those DEXs.

Beyond the Basic AMM

There are two kinds of DEX: those based on liquidity pools (AMM) and those based on order books. The latter preceded AMMs in time but are less popular today, so Tezos lacks projects of this kind. Nonetheless, certain order book-based functionality of DEX is missing from AMMs, like stop-loss or margin trading.

Trading open-term contracts with leverage that used to be available only at order-based exchanges is generally available in the AMM format. Still, Tezos does not have such projects either.

Right now, Tezos boasts only the most basic AMM-based DEX but the evolution of DEX is far from being over. On the contrary, the story of DEX on Tezos is only beginning, and lots of interesting things are down the road. Subscribe to our channels and never miss a thing:

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