Inventory of the business development models of several DEXs such as Uni, Aave, and L7: from single trading to diversified services

Author: Decryptor

Decentralized exchanges (DEX) are financial trading platforms built on blockchain technology that allow users to trade cryptocurrencies directly without intermediaries. Compared to traditional centralized exchanges, DEX executes trades through smart contracts, ensuring transparency and security in transactions.

In recent years, with technological advancements and changing market demands, the product strategies and business models of DEX have been continuously evolving, shifting from the initial single trading service model to providing diversified and comprehensive financial services. This strategic shift not only reflects the rapid development of the decentralized finance (DeFi) sector but also indicates a trend towards diversification in future financial service models.

To better understand the development of DEX, this article will attempt to review and compare common DEX models and strategies.

Basic DEX Models

At its inception, DEX focused on providing a decentralized trading environment. Subsequently, as market demand increased and to attract more crypto users, DEX gradually integrated aggregator functions. Below are detailed introductions to the two basic business models currently adopted by DEX.

Pure Trading Model

The pure trading model operates in a fully decentralized manner, allowing users to trade cryptocurrencies directly without the involvement of any centralized financial institutions. In this model, all transactions are automatically executed through smart contracts, ensuring transparency and security in the process. The core of this model lies in leveraging the immutability and decentralization characteristics of blockchain technology to reduce users' trust costs and trading risks.

Taking Uniswap as an example, it does not rely on a traditional order book but uses a model called Automated Market Maker (AMM) to provide liquidity. In this system, trades are not matched directly between buyers and sellers; instead, users choose to trade with a liquidity pool that is pre-filled with funds—these funds are deposited by other users holding tokens. After depositing tokens, these users earn transaction fees based on the trading volume in the pool.

Advantages:

• Decentralization. Users can trade without trusting any centralized institution, reducing the risk of censorship and fund freezing.

• User autonomy. Users have complete control over their funds and trading decisions, free from third-party interference.

Disadvantages:

• Liquidity issues. If the liquidity pool is not large enough, users may face high slippage, meaning the execution price of orders may deviate significantly from the expected price.

• Smart contract risks. Although smart contracts are theoretically secure, they may have vulnerabilities in practice, which could lead to fund losses.

Aggregator Model

To address the liquidity shortages of single DEX platforms, the aggregator model emerged. The aggregator model integrates the liquidity and trading pairs of multiple DEXs, providing users with a unified trading interface to find the best trading conditions across platforms. This model utilizes distributed liquidity pools and smart routing systems to ensure that users can seamlessly trade between different DEXs and optimize their trading strategies.

For example, 1inch is a DEX aggregator that combines multiple decentralized trading platforms. 1inch analyzes and compares prices and slippage across different DEXs through an integrated platform, then uses a technology called optimal path algorithm to provide users with the best trading route, helping them achieve the lowest-cost trades. Users only need to input specific parameters for the trade (such as the types and quantities of assets to buy and sell) to receive the best trading path calculated by 1inch.

Advantages:

• Price advantage. By comparing trading conditions across multiple platforms, users can obtain the best trading prices.

• Time efficiency. Users do not need to manually compare multiple platforms; the aggregator automatically completes this process, saving a significant amount of time and effort.

Disadvantages:

• Dependency issues. The effectiveness of the aggregator is highly dependent on the integrated DEX platforms. If these underlying platforms encounter technical or liquidity issues, the quality of the aggregator's services will also be affected.

• Complexity and usability challenges. Although aggregators theoretically provide convenience to users, the underlying algorithms and operational processes are complex, making it difficult for non-professional users to utilize.

These two basic DEX models each have their strengths and weaknesses, and their emergence depends on users' specific needs, the ecological environment, and market conditions. As the market continues to develop and similar platforms proliferate, DEX platforms need to continuously adjust and optimize their business models to better serve a wide range of users.

Evolution of DEX Models

In recent years, a large number of high-performance public chains have emerged, leading to a diversification of the crypto ecosystem. To meet the needs of multi-ecosystem users, cross-chain technology has become an essential evolution of DEX models. At the same time, as DeFi technology matures and modular, composable attributes flourish, many DEX platforms have begun to integrate DeFi to open up new development paths.

Integration of Cross-Chain Technology

Cross-chain technology allows interoperability between different blockchain platforms, bringing new development opportunities for DEX. This technology provides communication protocols between chains, allowing assets and data to be transferred across chains without a central coordinating entity. Based on this, DEX can break the limitations of a single blockchain, attract a broader user base, and offer more diverse asset trading options.

For example, Thorchain allows users to directly exchange assets between Bitcoin, Ethereum, and other blockchains without creating multiple wallets or registering on multiple exchanges. Thorchain uses its unique Continuous Liquidity Pools (CLP) protocol, enabling users to send assets directly from one blockchain to another, achieving true decentralized trading.

Advantages:

• Asset diversity. DEXs that support cross-chain trading can offer a wider variety of assets, attracting a broader user base.

• Enhanced liquidity. By integrating liquidity from multiple blockchains, trading slippage can be reduced, improving trading efficiency.

Disadvantages:

• Technical complexity. Implementing cross-chain technology requires significant technical innovation and complex security measures to ensure transaction security and data accuracy.

• Coordination challenges. Cross-chain operations involve multiple blockchains, necessitating effective coordination mechanisms to address potential technical and governance issues.

Integration of DeFi Functions

DeFi integration is one of the important directions in the evolution of DEX business models. By incorporating DeFi services such as lending, liquidity mining, and insurance into trading platforms, DEXs can not only provide basic trading functions but also offer users more comprehensive financial services. This integrated service model significantly enhances user convenience and asset utilization efficiency, attracting and retaining more users for DEX.

For example, Aave and Compound are DeFi platforms that create decentralized lending markets, allowing users to utilize their trading assets for various functions on DeFi platforms, such as collateralized lending, while continuing to participate in market activities, effectively "fighting on two fronts."

Advantages:

• Integrated services. DEXs that integrate DeFi services provide users with a one-stop financial solution, allowing them to complete everything from trading to investing in financial products on a single platform.

• Maximized asset utility. Users' assets can be used simultaneously for trading and participating in DeFi projects, such as liquidity mining or lending, increasing potential returns from multiple channels.

Disadvantages:

• Increased system complexity. Integrating multifunctional DeFi services may complicate the system, increasing maintenance difficulties and potential technical issues.

• Increased financial risks. While DeFi projects can offer high returns, they also come with high risks, such as significant market volatility and potential liquidity issues in funds.

Technological innovation has driven the evolution of DEX models, expanding their business scope and enhancing their market competitiveness. By introducing cross-chain technology and DeFi integration, DEXs are not just trading platforms but comprehensive financial service platforms, which is crucial for the development and maturation of the cryptocurrency market.

Diversified Development of DEX

Despite innovations in technology and services, in a highly homogeneous competitive landscape, DEXs need to consider expanding more project resources and ecosystems to meet users' demands for participation in more projects to maintain their competitive edge. Therefore, some platforms, including CEX and DEX, have begun to expand their business models, adding IDO/Launchpad sections and even establishing research teams to incubate quality crypto projects, achieving a closed loop of products/services from incubation to issuance to trading.

Recently, the well-known financial platform L7 announced a brand upgrade, which includes these service types. According to their brand upgrade article "Frontier Exploration: Web3 Digital Asset Management and Traffic Aggregation Platform L7 Brand Upgrade Evolution," the future IDO section will serve as a core service, providing project parties with an opportunity to issue tokens on decentralized exchanges (DEX).

Adding IDO Section

IDO refers to the model of initial public token sales on DEX. This model allows project parties to directly issue tokens to the public on DEX, typically accompanied by lower participation thresholds, thereby increasing the project's exposure, participation, and fundraising efficiency, while also providing a more convenient way for users to participate in early investments in new projects, offering them opportunities to enter potentially high-return projects.

For example, after L7 launched the IDO section, it successfully launched two projects, NEO FANTASY and LoserChick, achieving impressive fundraising results during the 7-day IDO period—NEO FANTASY raised over 4M+ USDT, exceeding 400% of its target; LoserChick raised over 3.8M+ USDT, exceeding 380% of its target. Currently, both projects are developing steadily, and their market values are gradually increasing, achieving a win-win situation for project parties and users through IDO.

Advantages:

• High potential returns. Early investments typically offer higher potential returns.

• Direct participation opportunities. Allows users to directly engage in the growth and development of emerging projects.

Disadvantages:

• High risk. The uncertainty and volatility of new projects correspondingly increase investment risks.

• Liquidity risks. Newly issued tokens may face market liquidity issues.

Establishing Research and Investment Departments

With the continuous development of DEX in the cryptocurrency market, some platforms have begun to actively explore how to enhance service quality and strengthen platform professionalism by establishing dedicated research and investment departments. The main functions of these departments include market trend analysis, publishing investment reports, project evaluation, and investment strategy formulation, aiming to select higher-quality projects for incubation and support, thereby providing users with more excellent project participation options.

For instance, Uniswap Labs and L7 have established research and investment departments focused on analyzing market development trends and researching emerging crypto projects, and they have investment funds to select and support the development of startup crypto projects. Taking RTC, invested by L7 Labs, as an example, L7 Labs conducted rigorous analysis and review before investing in it, and through its global ecosystem, it provided exposure, attracting over 100,000 active users. Meanwhile, L7 Labs formulated personalized strategies for incubation, deepening RTC's community culture and engagement, which is one of the key reasons for its explosive growth in both ecosystem and market value.

Advantages:

• Improved decision quality. The professional market analysis and investment advice provided by research and investment departments can significantly enhance the quality of investment decisions, increasing the success rate of DEX in selecting projects for investment.

• Risk identification and management. Through professional project evaluation and market forecasting, these departments help platforms and users identify potential risks and take corresponding risk management measures.

Disadvantages:

• High operational costs. Establishing and maintaining a professional research and investment team requires substantial financial investment, increasing the platform's operational costs.

• High information processing demands. The complex market and investment information require users to possess a certain level of financial knowledge and experience to fully understand and utilize it.

By introducing IDO and establishing research and investment departments, DEXs can not only enhance their platform's attractiveness and market competitiveness but also provide more comprehensive financial services to meet the growing user demand. These innovative initiatives not only improve users' investment experiences but also deepen the interaction and reliance between users and platforms, helping to build a more robust and active cryptocurrency trading ecosystem.

Conclusion

As DEX continues to grow and develop in the crypto market, we have witnessed their transformation from single trading functions to diversified services. These innovative initiatives have made DEX not just trading platforms but comprehensive financial service providers in the crypto space. However, the pace of DEX innovation has not stopped. In the future, it is foreseeable that DEX's business models will evolve further to match more user needs and the development of crypto projects, leading to more diversified innovations, such as integrating high-tech methods like AI to provide smarter services and products, enabling them to play a more significant role in the global financial ecosystem.