www.banklesstimes.com
HomeNewsThe Case for DEXs: Can a Layer 2 Surmount the Challenges?
The Case for DEXs: Can a Layer 2 Surmount the Challenges?

The Case for DEXs: Can a Layer 2 Surmount the Challenges?

Last updated 30th Nov 2022
Disclosure

Blockchain based digital assets are trustless and fully decentralized, but until very recently, trading these assets required a trust-based centralized exchange. It doesn’t take a genius to understand the flaw in the plan here. Where on one side we were vouching for a decentralized financial system, on the other hand, we were still dependent on centralized institutions. 

To bridge this gap emerged decentralized exchanges (DEXs) with the promise of being fully trustless and decentralized. So naturally, they picked up steam and became quite a rage among crypto enthusiasts. With these DEXs also came reward systems like yield farming and liquidity mining causing the total volume locked in DeFi protocols to touch a whopping $78.7B in March 2021.

But, if you think all is good in the hood then you’re mistaken. While the rise of DEXs solved many problems, they also brought with them several other problems. 

DeFi’s Catch 22

DEXs were created with the sole purpose of enabling as many people as possible to transact within a decentralized ecosystem. But the problem is that blockchain networks that these DEXs were based on aren’t prepared for this mass adoption. As the number of users increases, the problems also seem to grow. In fact, the DeFi boom of 2020 caused significant disturbances in the Ethereum mainnet multiple times due to network congestion. In situations like these, transaction times increase and gas fees skyrocket. 

When Uniswap launched its UNI token in 2020, the gas fees of Ethereum went as high as $6.31. And actually using DEXs like Uniswap is even more expensive with gas fees sometimes touching $50 or more. This is where the DeFi ecosystem is becoming a victim of its own success. The increased number of users is causing network congestion which is in turn deterring new users. 

Until these issues are resolved, the chances of DeFi mass adoption are slim. Thankfully, however, there seems to be a solution – Layer 2 DEX protocols. 

The Party is on Layer 2 

Why create an entirely new blockchain network when you can leverage the power of the existing network and enhance it further? This seems to be the popular thought because layer-2 solutions are quickly becoming the hottest trend in DeFi. We’ve all witnessed the tremendous growth of the Polygon network this year. 

If you’re unaware, Polygon Network is a layer-2 scalability and interoperability framework for existing blockchain networks. It addresses some of the major issues of the present-day blockchain platforms like poor usability, network congestion, high gas fees, and lack of community governance. Because of this, it has been one of the best performing layer-2 solutions in terms of traction. 

Now, built on top of Polygon is a layer-2 DEX called QuickSwap that could finally solve DeFi’s catch 22. 

Solving the DeFi Catch 22 With Layer-2 DEX

QuickSwap is an Ethereum-based permissionless DEX powered by the scalability of Polygon Network. In terms of functionality, QuickSwap is similar to other popular DEXs. 

Users can trade all supported ERC-20 tokens directly from their wallets on QuickSwap. If a particular token is not supported by QuickSwap, users themselves can list the token by providing enough liquidity for instant swaps. When this new token is traded by others, the liquidity provider gets incentivized with 0.3 per cent of the fee generated. This encourages more users to provide liquidity to the platform.

Apart from this, liquidity providers also get incentivized with QUICK tokens giving them a stake in the platform and the power to vote on governance decisions.    

QuickSwap cofounder Sameep Singhania

While all this doesn’t sound new, the fact that it is a layer-2 solution makes it a class apart from the rest. Users of QuickSwap can enjoy the comfort of high transaction speeds with nearly zero fees, thanks to the increased scalability. For reference, a fast transaction with Uniswap can cost up to $40 but the same transaction costs around $0.00001 if done with QuickSwap. 

Such low transaction fees encourage new traders to join the DeFi ecosystem and when they do join, issues like network congestion will be long-forgotten. While QuickSwap is currently meant for the Ethereum mainnet, the layer-2 integration has prepared it for deployment on other blockchain networks. This layer-2 DEX single-handedly solves all the issues with popular DEXs today and might just be the key for DeFi mass adoption. 

Conclusion 

The potential of decentralized finance is endless and remains largely unexplored. This is because of the various shortcomings that users encounter on blockchain networks. For DeFi to be able to compete with traditional finance, we need layer-2 solutions like QuickSwap that can offer concrete solutions for the problems faced by other platforms deployed on low-scalability networks.

Staff Writer

Staff Writer