The Problem With Decentralized Exchanges—And How To Solve It

Despite the proven economic value of decentralized exchanges (DEXs)—Uniswap, for example, recently traded more than $440 million in just 24 hours—they come with some serious baggage that’s hindering the growth of decentralized finance (DeFi).

The requirement to process orders through smart contracts causes latency, a lack of liquidity leads to price slippage, and high transaction costs are a barrier to wider adoption.

Some exchange operators have stepped in with solutions that aim to help lower the barrier to entry for people with fewer crypto assets. But democratizing access to the crypto economy has created another intractable challenge tied to decentralized exchanges, and that’s cross-chain bridging.

Because tokens can be listed on multiple exchanges, traders need to transfer their coins between chains before they’re able to do anything with them—and that can be costly, not to mention an unpleasant user experience.

It can cost anywhere between $200 and $500 just to bridge assets from one chain to another—and that’s before having to pay fees to actually execute transactions, said Giorgi Khazaradze, CEO and co-founder of Aurox, a crypto trading terminal that combines a centralized exchange with a decentralized lending and borrowing platform.

“It’s like wiring myself money to another bank and then having to spend hundreds of dollars just to get my own money,” Khazaradze told Decrypt.

Building bridges

It’s not hard to imagine why decentralized exchanges, and decentralized finance in general, have failed to win over institutions and achieve mainstream retail adoption.

The fees are high—and highly variable—and the user experience is confusing.

“An institution will look at this and say, ‘Well, this is kind of weird, and so I don’t really want to touch it’,” Khazaradze said. “And the same is true for retail users—they’re not going to spend their time figuring out this new technology.”

Imagine the scenario: A trader runs out of assets on Polygon and buys Ethereum on Coinbase with the intention of bringing it to Polygon. Well, they can’t, at least not without going through a multi-step process and coughing up a bridging fee.

“It’s a very big problem, because it creates a barrier between these different chains and blocks users from interacting,” Khazaradze said. “Other chains are not getting as much action as they could be if the user experience was better.”

Dealing with the cross-chain bridging problem “is the next important step forward” to building the crypto community, said Justin Wu, CEO and founder of DeFi Summit, a conference dedicated to decentralized finance.

“Being able to pull trades across any chain and have it be interoperable is ideal—but we are still so far from it,” Wu said. “With many chains going EVM [Ethereum Virtual Machine] it’s a bit easier to move assets across these days, but when you start introducing other Layer-1s and 2s into the mix that are based off of other ecosystems, it becomes a challenge.”

The best of both worlds

Aurox recently started work on a solution to fix cross-chain bridging issues and allow users to transact any type of token across chains, including trading and investing, while eliminating the initial bridging fee.

Stepping up to actively address the issues plaguing cross-chain infrastructures speaks to Aurox’s reason for being and its novel approach to lending and borrowing.

“[Users] need to get the same look and feel as they’re used to on any regular trading platform.”

Usability problems, including messy crypto exchange fees, are the primary hurdles holding back traditional investors.

“They need to get the same look and feel as they’re used to on any regular trading platform,” Khazaradze said.

The purpose of the Aurox terminal, which is powered by URUS, the Aurox token, is to serve as an all-in-one crypto trading hub—not all that dissimilar from a Bloomberg terminal—that helps users accelerate their trading by making it easy to trade or invest crypto.

“Usability is important if we want mass adoption,” Wu said. “We have to create ‘Robinhood’ for the everyday trader.”

Aurox’s centralized trading system gives users a single platform they can use to trade across any asset, while its decentralized lending protocol allows traders to borrow and leverage funds from the DeFi lending pool with guaranteed price execution for larger order sizes.

Traders can earn interest by lending their unused funds, which means middlemen don’t have an opportunity to engage in crypto lending arbitrage and take their cut. This helps boost the interest rate on Aurox, Khazaradze said, because users can execute orders directly through the platform.

The liquidity on decentralized exchanges is generally very low, as is the volume for any token other than the major players. Meanwhile, on centralized exchanges, there’s a significant amount of volume and the majority of trading pairs are highly liquid.

Bringing the two together is the best of both worlds, Khazaradze said.

Lenders can keep their money safe with a decentralized lending pool, while traders have the opportunity to trade on a highly liquid market.

The same concept is at play with the URUS token.

Users get discounts for paying their margin and trading fees with URUS, traders get a lower interest rate, and lenders have the option to receive their interest earnings in URUS tokens which comes along with an interest rate boost. Users can also stake rewards for depositing and holding URUS in their wallet.

“It’s all about simplifying trading for our users,” Khazaradze said. “Which is why the next step for us is focusing on the decentralization aspect, because people need to be able to transact on decentralized exchanges with low fees and across chains.”

9 November 2021 18:01

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