Non-ETH DEXes - Is it Time to Look Past Ethereum for Trading?

Some of the most popular DEXes (decentralised exchanges) such as Uniswap and Sushiswap are powered by EVM (Ethereum virtual machine) using Ethereum’s mainnet. It is understandable why Defi projects such as these would see the ‘DeFi pioneer’ as a suitable home. Its smart contract functionality makes it easy to deploy automated liquidity-pools to facilitate fluid trading.  However Ethereum’s gas-fee issues and long transaction times are often to the detriment of user-experience with these platforms.

As other L1 chains like Solana (SOL) and scaling solutions like Polygon (MATIC) increase in popularity, questions are being raised surrounding whether they offer more effective homes for decentralised exchanges. Let us take a look at some of the alternatives and why they might be used. 

What Options Are There?

Beyond the Ethereum main chain, there exist numerous decentralised exchanges which provide alternative means of swapping and exchanging cryptocurrencies. In theory, any blockchain with smart contract functionality can facilitate a decentralised exchange.

Some DEXes such as QuickSwap and LoopRing Exchange utilise Ethereum L2 scaling solutions to optimise decentralised exchanging, while still recording transactions on the Ethereum mainnet. This allows the processing of the market transaction to take place off chain which allows transactions to occur at higher speeds for lower fees.

Others like PancakeSwap, Newdex and LunaDEX utilise an entirely different chain to Ethereum - circumventing all of Ethereum’s scaling issues entirely. As a result of high-speeds associated with Solana (SOL), LunaDEX in particular can facilitate much higher trading speeds when compared to Ethereum.

But before non-ETH DEXes are paraded as the answer to all DeFi problems, it is worth examining why native Ethereum DEXes are as popular as they are. 

The Case For Ethereum DEXes

The advantages of using ETH-native exchanges are perhaps more obvious than those of non-ETH DEXes. Ethereum is one of the most widely recognised and utilised blockchains in the world and has DeFi functionality at its core. As a result of its widespread usage, Ethereum-based exchanges have access to significantly more liquidity when compared to other chains.

As a DEX becomes widely recognised (as many popular Ethereum-based exchanges are), the security risk associated with their use is diminished. Smaller, lesser-known exchanges generally represent greater security-risk and are typically more susceptible to hacks and smart contract errors - putting liquidity pools at risk of theft or erroneous distribution.

A greater level of usage means smart contract developers are more experienced with implementing proposals. Newer L1 chains such as Solana might have higher specs on paper, but are still at a relatively early stage in their development and usability. However, there are several reasons why a non-ETH exchange might be preferable.  

The Benefits of Alternative Exchange-Infrastructure 

One of the main issues surrounding the use of lesser-known alt-exchanges is their lesser liquidity. An abundant and secure liquidity pool is crucial to the smooth running of a smart contract operated exchange. Large liquidity pools are necessary to ensure that orders can be finalised within a reasonable period of time, before prices change.    

But while the issue of comparatively limited liquidity might apply to exchanges built on alt-chains, DEXes which utilise ETH L2 scaling solutions such as QuickSwap (using Polygon) and Loopring Exchange (using Loopring Protocol) in fact have access to the same liquidity as those which are ETH-native. They use separate chains for processing transactions, but still record them on the Ethereum mainnet and utilise ERC-20 tokens for their liquidity pool. This allows them the benefit of significantly lower fees for transactions.

There are also the less important advantages of using alternative exchange-infrastructure. Exchanges built on alt-chains might have markets which are unavailable to or more expensive for Ethereum-based exchange users. Non-ETH exchanges might also have more lucrative arbitrage opportunities as a result of their relative obscurity (although admittedly this is a relatively niche application for the average exchange user). 

Non-ETH exchanges are still finding their footing. As with most aspects of DeFi, the space is in constant development and there is little consensus regarding what the ‘optimum’ means of crypto exchanging is. The popularity of ETH-based exchanges like Uniswap might not be an endorsement of its effectiveness, but rather simply the fact that it was an early contender which attracted large amounts of liquidity. 

If Ethereum is to remain the dominant infrastructure for decentralised exchanges, it will have to address the needs of its user base, or risk losing liquidity to faster (albeit less-secure) exchanges built upon chains with more impressive specifications. 

Written by Rob Henderson for Novum Insights

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