Decentralized Exchange

Decentralized exchanges rely on smart contracts to allow traders to execute orders without an intermediary. Skalex provides high-performance decentralized exchange solutions to enable your customers to seamlessly trade cryptocurrencies peer-to-peer.

How do DEXs work?

Cryptocurrencies have created a way to trade values without the need for intermediaries. Blockchain technology allows strangers to trust each other without the need for a central institution. Decentralized exchanges or DEXs enable trading in a decentralized way without a central institution maintaining the ledger or controlling user funds. As of today DEXs exist in the form of smart contracts running on the Ethereum blockchain. DEXs have evolved over the years, but the Uniswap model, which relies on automated market makers (AMM), is the current most popular. Whereas a traditional exchange model relies on an order book, Uniswap operates liquidity pools of token pairs.
Liquidity providers deposit their funds into these pools in return for a share of the transaction fees paid by users who swap their tokens using that pool. Some sophisticated economic calculations take place under the hood. But effectively, the AMM is a pricing algorithm that continually adjusts the quote according to the balance of supply and demand in the pool.
Token issuers often incentivize liquidity providers to deposit into their pools with token rewards, a practice known as yield farming.

Skalex offers two types of decentralized exchange solutions: Automated Market Makers and DEX Aggregators.
Both allow users to trade directly with each other via their smart contracts.

Automated market makers (AMMs)

The idea of an automated market maker (AMM) system that relies on smart contracts was created to solve the liquidity problem. The creation of these exchanges partly came from inspiration originating in Ethereum co-founder Vitalik Buterin’s paper describing how trades can be executed using blockchain based contract holding tokens.
The use of blockchain oracles is an innovative way for decentralized exchanges (DEX) to provide liquidity without having any centralized servers that could shut down at any time. The smart contracts rely on pre-funded pools known as “liquidity pools” (LPs) which users can put money into.
The pools are funded by other users, who are then allowed to claim the transaction fees charged by the protocol for executing trades with that pair. These liquidity providers must deposit a corresponding value of each asset in the trading pair to earn interest on their cryptocurrency holdings, a process known as liquidity mining.
Leveraging liquidity pools allows traders to execute orders or earn interest in a permission- and trust-free manner. These exchanges are often ranked by the amount of funds locked in their smart contracts, called “Total Value Locked” (TVL), as the Automated Market Maker model has a downside when there is not enough liquidity: slippage.
Our solution is based on Uniswap v3 smart contracts.
Uniswap v3 introduces:

• Concentrated liquidity, giving individual LPs granular control over what price ranges their capital is allocated to. Individual positions are aggregated together into a single pool, forming one combined curve for users to trade against
• Multiple fee tiers, allowing LPs to be appropriately compensated for taking on varying degrees of risk

These features make Uniswap v3 the most flexible and efficient AMM ever designed:

• LPs can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital
• Capital efficiency paves the way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs
• LPs can significantly increase their exposure to preferred assets and reduce their downside risk
• LPs can sell one asset for another by adding liquidity to a price range entirely above or below the market price, approximating a fee-earning limit order that executes along a smooth curve

DEX Aggregators

DEX aggregators leverage various protocols and mechanisms to solve liquidity-related issues. These platforms essentially pool liquidity from multiple DEXs to minimize slippage on large orders, optimize swap fees and token prices, and offer traders the best deal possible in the shortest possible time.
Certain DEX aggregators also use liquidity from centralized platforms to provide users with a better experience, while not relying on exchanges through integration with specific centralized exchanges.
Skalex can provide solutions for providing liquidity in both directions:
1. from DEX LPs to the CEX order book.
2. from the CEX order book (fiat liquidity) into DEX LPs.
Contact us now for more information!