It is ironic that despite riding to fame on the wings of decentralization, the majority of the world’s cryptocurrency trading happens on centralized exchanges (CEX). From Binance to Huobi Global, centralized exchanges still dominate the market. But despite being the primary choice, CEXs are laced with a lot of bottlenecks. For one, trading on a centralized exchange means that the capital and private keys of an individual will be managed by the exchange to facilitate trading.
This setup creates a lot of problems such as wash trading, price and token manipulation, censorship of traders, and trade freezing. Furthermore, with centralization comes an unsettling security risk – a single point of failure and possible security breaches. High-profile breaches such as Bitfiniex and QuadrigaCX, where millions of dollars’ worth of digital assets were stolen are a testament to the inherently weak nature of centralized exchanges.
The issues with CEXs paved the way for the development and adoption of decentralized exchanges (DEX) – a new structure that could drive true decentralization. In the case of DEX, the exchange operates a distributed ledger, implements smart contracts, and eliminates the single point of failure challenge.
But when compared with their centralized counterparts, DEXs are generally faced with poor liquidity, a lack of advanced trading tools, zero interoperability, and inferior user experience. A secondary problem is that since DEXs offer non-custodial solutions, every single order is made public on-chain, leading to the possibility of front-running.
“Front running, also known as tailgating, is the prohibited practice of entering into an equity trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large (“block”) pending transaction that will influence the price of the underlying security.”
With all of these problems in mind, Polkadex is out to do the work.
Polkadex is Out to Innovate
Polkadex is a fully decentralized and hybrid peer-to-peer order-book crypto exchange, backed by Web3 Foundation. The trading platform runs on the Substrate framework and merges the Automated Market Maker (AMM) model – common in most DEXs, with the Order Book model used by centralized exchanges.
The DEX is on a mission to combine the user experience and features of centralized cryptocurrency exchanges with the added benefits of decentralized security. On this note, the Polkadex solution is innovating in four core areas – customer experience, liquidity, custody of assets, and execution speed of trades.
It is a no-brainer that without an easy-to-use front end, beginners and even experienced traders will prefer to use centralized solutions. As earlier stated Polkadex is building a decentralized network using the Substrate Blockchain Framework. They are keen on addressing the interface problem by launching a trading experience that has a “centralized feel.”
The Substrate framework enables the creation of application-specific, composable, and interoperable blockchains without having to deal with the complexity of block production and consensus. It also allows a modular structure for building decentralized applications.
To improve customer experience and increase throughput, Polkadex focuses on a rather slim design that reduces the complexity of the chain. Only features that need public verifiability go on-chain. While features like Order-book, On-chain market making tools, Bridge mechanism, and Trader Assets Management go on-chain, other features like market data aggregation, storage and retrieval of trade history, and technical analysis indicators stay off-chain.
This slim design allows the network to increase the throughput of trades. As a matter of fact, the Polkadex platform has been able to achieve a speed of 173 transactions per second, as opposed to Binance’s average of 153 trades per second. In order words, Polkadex has a shot at going head-to-head against some of the top centralized exchanges.
To solve the problem of low liquidity, Polkadex connects AMMs directly to its trading engine. The auto market markers function as on-chain market-making bots. If a trade is not matched against the Polkadex order book, the engine will call on the on-chain trading bots to try to match the order. Trades will be executed only if a better price is provided by the on-chain bots. This ensures that there are no price slippage problems for traders.
In its first iteration, Polkadex will support two types of trades – Limit and Market Orders. While market takers attract a trading fee of 0.2 percent, market-making orders have zero trading fees. Meanwhile, half of the collected fees are assigned to marker makers while the remaining 50 percent is set aside for growing the Polkadex network.
It is easy to forget that the point of Bitcoin and digital assets at large was to create decentralized solutions. As with traditional financial systems, centralized exchanges are inherently flawed. They are heavily manipulated and a honeypot for hackers.
Polkadex is shaking up the space by creating a solution that truly embraces the ideas of decentralization while embracing the good side of centralized exchanges. If their claims are anything to go by, then Polkadex is expected to succeed where many decentralized exchanges have failed. Their innovation could tilt the crypto exchange war in favor of decentralized exchanges.
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