Analysis of the Current Development Status and Challenges of the Cross-Chain DEX Market

Original Author: ZKCross
Original Title: 《Dive into the Cross-Chain DEX Market》

Compiled by: Eva, Chain Catcher

Introduction

One of the reasons that complicates cryptocurrency trading is the sheer number of blockchains and exchanges involved. For example, if a user wants to transfer 2 ETH from the Ethereum blockchain (ERC-20) to the Avalanche network, they may need to go through many processes and steps to obtain AVAX tokens on the Avalanche network. This approach can be time-consuming, especially for inexperienced new users who may spend a lot of time searching for and evaluating decentralized finance (DeFi) tools and platforms to find the most suitable tools for their specific scenarios. Experienced users also need to consider tracking gas fees for packaged token blockchains and navigating numerous user interfaces.

However, the emergence of cross-chain decentralized exchanges (DEX) addresses these issues, as each exchange can rely on smart algorithms to fulfill trading requests across many blockchain ecosystems. Cross-chain DEXs are a key component in unlocking cross-chain liquidity, as this liquidity has remained untapped while decentralized finance seeks mainstream adoption and competes with centralized financial systems. With increasing interest in major and minor cryptocurrencies, interoperability between chains is crucial for facilitating the seamless flow of digital assets across networks. Ultimately, game-changing multi-chain solutions will lead to the realization of a free market.

Cross-Chain DEX Sector

Cross-chain DEXs build upon the development work of current DEXs and aggregators, pooling liquidity through new multi-chain network protocols. They leverage smart algorithms to enable users to trade across many blockchain ecosystems, thereby increasing liquidity, asset diversity, and trading volume, and fostering the continuous growth of the decentralized finance market. Cross-chain DEXs are essential for DeFi to fully utilize cross-chain interoperability and liquidity.

In the foreseeable future, the fate of DeFi is almost certainly cross-chain. Players that can provide simple and effective inter-chain integration methods will become key projects and capture significant market share. Imagine several DEXs allowing cross-chain use cases. The cross-chain capabilities of DEXs will be driven by the widespread adoption of cryptocurrencies and the demand for blockchains to attract billions of users and handle millions of daily transactions. Achieving such numbers in a secure and decentralized manner is challenging for a single blockchain due to technical limitations. Additionally, the development of blockchain bridges is a reality, currently in operational stages. These bridges enable users to seamlessly integrate and interact with several blockchains.

Key Features of Cross-Chain DEXs

• Fundamental features of cross-chain DEXs
• Blockchain agnosticism
• High liquidity
• Fast
• Scalable
• DEX aggregation
• Cross-chain bridges between chains
• Slippage optimization

How Cross-Chain DEXs Work

Using unique algorithms, cross-chain DEXs determine the best route for completing trade orders across different blockchain ecosystems. They maximize the use of P2P networks to share orders and find a low-cost route for orders by exchanging token prices and fees, enhancing slippage through automated order execution. Cross-chain DEXs utilize cutting-edge multi-chain network topologies to pool liquidity from multiple blockchains. They leverage the interoperability provided by this integrated blockchain architecture to enhance liquidity and asset diversification in the decentralized finance sector.

Cross-Chain DEX Protocols

The most popular DEXs today are still blockchain-specific, with Ethereum-based solutions leading the way. Uniswap launched on the Ethereum mainnet in November 2018, and since then, its popularity and valuation have skyrocketed, with a market cap of around $5.7 billion. Sushiswap is another popular Ethereum-based DEX platform that forked from Uniswap. Subsequently, Binance Smart Chain and Polygon have also released DEX solutions based on their blockchains. Here are some of the most popular cross-chain DEXs:

• THORSwap
• GravityDEX
• 1Sol
• Chainflip
• O3
• SolanaX
• Polkadex

Comparative Analysis of Cross-Chain DEX Protocols

The table above compares the major players in the cross-chain space. Cross-chain protocols allow projects to make their own decisions and promote fair competition. If one network is cheaper or faster than another, assets can move freely. However, this is not the only requirement: cross-chain bridges must be decentralized to meet the spirit of blockchain technology and cryptocurrencies.

Benefits of Cross-Chain DEXs

The emergence of cross-chain DEXs simplifies and accelerates the process for DeFi users to exchange tokens across multiple chains, which previously required navigating centralized trading platforms. Cross-chain transactions conducted in the usual way can take anywhere from a few minutes to several days and incur substantial processing fees. Cross-chain DEXs can complete transactions in just a few steps and seconds, a process familiar to users.

However, recent security breaches have made consumers realize that when choosing a cross-chain DEX, security may be a primary consideration alongside efficiency and price. Cross-chain DEXs were created to address the lack of liquidity and disruptive slippage fees in today's DEXs, aggregating distributed liquidity from several blockchain protocols onto one platform.

• Enables seamless trading: Cross-chain trading simplifies cryptocurrency transactions by eliminating bottlenecks.
• Cross-chain trading achieves truly decentralized cryptocurrency trading. It enables seamless exchanges of digital assets without the need for third-party governance.
• Reduces third-party risk. Ensures that token holders always have complete control over their tokens. Because holders are the sole owners of their private keys, they maintain full control over their digital assets.

Challenges of Cross-Chain DEX Protocols

While DEXs seem to solve the most common problems of centralized exchanges, they also have their own drawbacks. Currently, DEXs lack stable pricing mechanisms, meaning they can charge users fees above the true value of tokens.

• Limited throughput due to slow order matching has attracted users to centralized exchanges.
• DEXs lack liquidity due to a smaller user base.
• No fiat currency trading.
• Logical risks.
• False deposits.
• Cross-chain security risks.
• Multi-signature vulnerabilities and quota vulnerabilities.
• DEXs require synchronization of thousands of independent computers, leading to longer block confirmation times and slower transaction performance.

Conclusion

Cross-chain DEXs allow crypto users to trade across multiple blockchain platforms, bringing freedom and opportunities to DeFi and the crypto market. This freedom offers a range of benefits to cryptocurrency users and the crypto ecosystem. It ends the autonomous interactions of blockchains, enabling them to communicate and exchange data with each other. In this way, users' assets can flow freely between different blockchains. However, existing solutions in the market still have room for improvement. A more secure, scalable, and low-cost solution will aid in the adoption of cross-chain DEXs. ZKCross is building a multi-chain zkRollup cross-chain protocol to meet this demand.