Liquidity fragmentation in the world of decentralized exchanges
The crypto industry has gone a long way from the first crude Bitcoin markets to the advanced functional exchanges we see today. However, that doesn’t mean that the current state of the exchange market doesn’t come with its own set of problems.
The first cryptocurrency exchange that has ever existed in the industry popped up in the first half of 2010, offering users a rickety old website where they could purchase Bitcoins with PayPal. While it certainly wasn’t obvious at the time, the now-defunct Bitcoinmarket.com started a shockwave that resulted in thousands of trading platforms setting up shop on the market.
However, the rapid rise of crypto-to-crypto and fiat-to-crypto exchanges unveiled a huge problem the industry was facing — centralization.
Now we were back to where we started. The problem decentralization was initially trying to solve was centralization. And with the centralized exchanges taking over majority of the market liquidity and volumes — there was no innovation done or problem solved. Just that the keys to the liquidity were handed over from the hands of bankers to the hands of exchange owners.
And as we see most recently in the case of Gamestop and AMC, centralized platforms such as Robinhood and ETrade always have an incentive to make the types of decisions that may or may not be the right type of decisions, even if individually some of these might be good decisions.
That’s where decentralized exchanges stepped in.
Essentially automated market maker (AMM) algorithms codified in smart contracts, decentralized exchanges allow direct, peer-to-peer transactions to take place without the need for an intermediary. Decentralized exchanges don’t hold user funds, essentially making hot wallet hacks impossible.
One of the biggest decentralized exchanges to have emerged in the DeFi market is, without a doubt, Uniswap. Launched in 2018, it was the first breakout automated market maker launched on the Ethereum network. Promising unprecedented speed and efficiency, Uniswap quickly raised several financing rounds, bringing in over $11 million in investments from industry heavyweights such as a16z Crypto and Paradigm.
What truly separated Uniswap from both centralized exchanges and other decentralized exchanges on the market was the way it sourced liquidity. The platform allows users to provide the assets and overall liquidity through liquidity pools, smart contracts holding a pair of assets that give each other value.
The popularity of Uniswap and its UNI token really pushed the DeFi narrative into the mainstream. The platform attracted hundreds of thousands of users, raking in billions of dollars of total value locked (TVL).
However, Uniswap didn’t come without its own set of problems, either.
Considered less decentralized and impartial than ever due to the VC funding it received, Uniswap saw another decentralized exchange form in August 2020 — Sushiswap.
While it is a Uniswap fork, Sushiswap drastically changed the way decentralized exchanges work. It took all of Uniswap’s design deficits and introduced significant improvements, all aimed at the Sushiswap community. The protocol rewards its liquidity with 0.25% of all the pool fees, alongside another 0.05% that’s paid to those holding SUSHI tokens. It also introduced a much more robust yield farming system, with rewards in some pools providing as much as an 80% APY.
The fork was also pushed by industry heavyweights like SBF, founder of FTX who also later oversaw the complex Sushiswap -> Uniswap liquidity migration.
Sushiswap’s ambitious plans for the industry have been overshadowed by the drama caused by the fork, as Sushiswap took over around $1 billion in total value locked from Uniswap in a matter of hours.
Imagine now having access to the liquidity provided by both platforms.
The schisms that formed in the DeFi industry between various decentralized exchanges would be meaningless, as users would be able to use bridges to port liquidity from one protocol to another.
This is where Router steps in.
We believe that the future of the crypto industry will be a multi-chain one and that users don’t need to give up the functionalities of one protocol to enjoy the liquidity offered by another. We are focused on creating the infrastructure that would enable users to access the liquidity provided both on Uniswap and Sushiswap, allowing users to seamlessly go between them.
Taking this one step further, the Router team is convinced that the future of cryptocurrency will be crosschain and we want to skate where the puck is going. So our plan is to take trading beyond Ethereum and introduce a network of liquidity that will also route orders across Polkadot, Matic, XDai, Cardano and others. The liquidity movement will be a comprehensive one and users will be able to trade seamlessly across chains. While our vision is lofty, our goal is to make operations like these — effortless.
So in short, our focus is to build the industry’s first fully operational cross chain aggregator. While current aggregators such as 1inch and Matcha have paved the way we’d like to build on their innovations to include more of the ecosystem. With upcoming developments in Polkadot, Cardano and others we feel there is an immediate need for crosschain to go mainstream.
With more decentralized exchanges popping up every day, each one offering bigger and better yields and faster, more efficient swaps, why should you be forced to choose when you can reap the benefits of all!
About Router Protocol
Router Protocol is building a suite of cross-chain liquidity infra primitives that aims to seamlessly provide bridging infrastructure between current and emerging Layer 1 and Layer 2 blockchain solutions.
Telegram announcements: https://t.me/router_ann