The current Etheruem DEX Ecosystem.

While there are several projects outside of the Ethereum ecosystem that are tackling the DEX opportunity ( BitShares , Waves , Stellar , etc.), this post will focus on DEXs within the Ethereum ecosystem as these other DEXs are proprietary to their respective ecosystems and are a fraction the size of the Ethereum ecosystem. In time, cross-chain atomic swaps will enable trust-less cross-chain DEXs. However, these opportunities are further out.

The current projects in the Etheruem DEX Ecosystem:

As I am a growing fan of the 0x protocol, I shall go through its competitors in this post, and shall write about the 0x protocol in detail in my following post.

1. AirSwap

AirSwap is an implementation of the Swap Protocol . It is similar to 0x in many ways, using indexes instead of relayers. The protocol itself does not require a token (in fact, the Swap white paper never even mentions a token). AirSwap is the first index that is built on top of the protocol, and it has integrated its own token, AST. AST isn’t used to pay fees, but rather to post an intent to trade to the index. In 0x, makers broadcast orders with specific parameters, including price. With AirSwap, makers simply post to an index saying which token pairs they’d like to trade. Takers can see these posts, and the maker and taker can then negotiate price directly before filling the order on the blockchain.

In order to post to the index, a maker must lock up a specific amount of AST, which entitles the user to a certain number of posts over some time period. AST token holders are also able to vote on the integration of price oracles in the platform. While this token model is interesting, it does have one major flaw. Because the token is index-specific, not broadly useful for the Swap protocol, a competitor could build an index on top of the Swap Protocol and undermine AirSwap in any number of ways—by replacing the token with ETH, by eliminating it entirely, or just by providing a better service with a token of their own. This presents a major risk to investors in AST. 0x also offers relayers the ability to offer identical services to Swap Protocol indexes, plus more. Relayers can mimic AirSwap index functionality with a strategy called “ quote provider .” Users connect in off-chain channels to signal intent to trade and negotiate prices before submitting trades to be executed. It will likely be difficult for AirSwap or other indexes built on the Swap Protocol to compete with this flexibility.

2. Kyber Network

Kyber Network is another decentralized exchange platform built on Ethereum, with an entirely different design. Kyber’s major advantage is that it allows for trades to happen quickly. Users can submit a trade request and receive their new tokens in a single transaction. Kyber accomplishes this by having third parties that host reserves of different tokens. Users interact with the Kyber smart contract by requesting a specific trade. The smart contract scans the various reserves, choses the one offering the best price, and then performs an atomic swap of the tokens.

Kyber depends upon third parties who are willing to set up reserves— this requires a large allocation of up-front capital, which must then remain in the reserve to fill orders. Reserves earn profits on the spreads from orders they fill. This is not the most efficient use of capital, and profits earned may not be enough to motivate third parties to operate reserves. Kyber has said that public reserves could be created, where profits are shared among contributors, but again this would be hard to motivate without charging large spreads which would disincentivize users from actually using Kyber. Kyber’s token dynamics are also somewhat questionable. The native token, called KNC, is mostly used by reserves. Reserves are required to have a minimum KNC balance to participate in the protocol, and they also must pay a fee, denominated in KNC, for every trade they fill. Some of these fees are paid to other actors in the trade, like wallet operators, while the rest are burned. Users don’t have to pay fees directly, but these costs will likely be passed through to them through wider spreads. 0x also allows relayers to function much like Kyber reserves. Relayers and large token holders can use the “ reserve manager ” strategy, which allows the relayer to provide its own liquidity. While Kyber and AirSwap are both interesting projects, 0x’s extremely flexible functionality is competitive with both of these protocols, and also offers further benefits.

3. EtherDelta

EtherDelta is a live decentralized exchange built on top of Ethereum that has been up and running for more than a year. EtherDelta is slow and clunky and can be difficult to use. EtherDelta, like 0x, uses an off-chain matching service with on-chain execution, but it only has a single interface. EtherDelta is a DApp, rather than a protocol, so it is much less flexible than 0x. Our early experience with the first relayers in beta has been much easier and more fluid than using EtherDelta.

4. OmiseGo

Finally, OmiseGo is working on a decentralized exchange that will implement an on-chain orderbook. Although OmiseGo eventually plans to run as a series of independent plasma chains, OmiseGo will launch in the coming months on as a Cosmos zone. Cosmos offers orders of magnitude more throughput than Ethereum today; OmiseGo intends to use the increased throughput that Cosmos provides and Ethermint to enable trading ERC20 tokens in the near future. This is a very indirect process, requiring multiple hops from Ethereum, to Ethermint, across the Cosmos network into the OmiseGo zone, and then back, in order to settle a trade. We are dubious that this complex system will work at all, or that even if it does, that it will offer an acceptable user experience.

The OmiseGo white paper also states that the OmiseGo DEX will not focus on high-volume, low-value trading, which is much harder to achieve on-chain. Their focus will be on larger transactions and settlements, leaving lots of room for 0x to carve out a majority market share. OmiseGo is trading at roughly 10x the valuation of 0x and so represents much lower risk adjusted returns.

In my next few posts, I shall be posting in more detail about the 0x protocol, and why I think they are the best DEX now in the Ethereum ecosystem.