A Quick Overview of the Emerging DEX Development Landscape on Bitcoin Layer 1

Original Title: “Overview of the emerging Bitcoin Layer 1 DEX landscape.”

Author: Jonnyhimalaya

Translation: Baihua Blockchain

This article explores some of the most promising Layer 1 Bitcoin decentralized exchange platforms (DEXs) and automated market makers (AMMs). Most of these markets are still in development, with some only in the testnet phase. Overall, these markets can be divided into two categories: order book trading platforms and automated market makers. This article includes research interviews with most of the teams involved.

DeFi on Bitcoin is on the horizon. We have already seen glimpses of what DeFi on Bitcoin looks like, with the emergence of Ordinals, Runes, and meta-protocols like BRC20 and TAP. The community hopes to trade "meme coins" on Bitcoin, and this situation is about to change!

Currently, the experience of trading tokens on Bitcoin is poor and fraught with friction. On markets like Unisat and Magic Eden, sellers of tokens (BRC20 or Runes) must list a specific number of tokens at a specific price and wait for buyers to purchase the same number of tokens at that price, which increases the friction of trading.

Many teams are trying to solve this problem by bringing AMM and DEX-style trading to Bitcoin, providing the trading experience we are accustomed to on EVM. Since Bitcoin uses the UTXO model rather than the account model used by EVM, certain features need to be redesigned. In fact, UTXO has technical characteristics that EVM cannot achieve, particularly in designing partially signed Bitcoin transactions (PSBT) for atomic swaps.

When analyzing each market, I considered specific criteria: user experience during exchange, degree of decentralization, whether permission is allowed, and other trade-offs.

Most teams are innovating in PSBT and signature hash (Sighash). Sighash is the mechanism used to sign Bitcoin transaction inputs and outputs. There are six different types of Sighash, ranging from the most secure but least flexible "Sighash All" to the least secure but most flexible "Sighash None --- Anyone Can Pay." Currently popular markets like Unisat and Magic Eden use "Sighash-Single" to create their PSBTs. This means not all outputs are signed, and transactions may be subject to MEV sniping. Using "Sighash-All" means all inputs and outputs are fully signed, and any transaction signed this way can avoid MEV sniping.

When analyzing DEX or Swap, many other factors need to be considered, such as liquidity and slippage, market making and taker fees, liquidity provider incentives, trading volume, etc. However, since most of the analyzed markets are still in testing or early release phases, these metrics will take time to become relevant.

1. Fluid BTC

Website: https://btc.fluidtokens.com/swap

Twitter: https://x.com/FluidtokensXBT

Fluid Tokens is an order book-based decentralized trading platform (DEX). Users can currently trade Runes-BTC, and the Runes-Runes feature is coming soon. Fluid is essentially a peer-to-peer trading market. When traders want to create an order (maker), they make an off-chain "commitment" (for example, I want to sell 1000 $DOG for 0.001 BTC). These commitments are published as limit orders on the order book. When a buyer (taker) accepts the order by making a market buy or sell, they initiate a PSBT (partially signed Bitcoin transaction) detailing all inputs and outputs promised by the maker. The original maker is then notified (via email or in-app) that their limit order has been matched, and they sign the PSBT to broadcast the transaction to complete the trade.

This trading design is completely permissionless and peer-to-peer. The market essentially facilitates these trades. The trade-off lies in the back-and-forth of user experience. The maker makes a commitment, publishes a limit order ------ the taker matches the order and initiates the PSBT ------ then the maker signs and completes the PSBT. This friction essentially slows down the trading process, which often does not meet the needs of traders looking to sell quickly. Another potential issue is order manipulation or spoofing, where the maker creates orders they do not intend to fulfill to try to manipulate prices. To mitigate this, the Fluid platform currently allows only one maker commitment per order per address. Therefore, it is temporarily not possible to build positions incrementally through ladder orders, but this feature is in the development plan.

All trades on Fluid are completely permissionless, and because "Sighash All" can be used in the PSBT, they are also protected from MEV and sniping, meaning transactions will only be validated when both maker and taker addresses participate in the trade. Third parties cannot "snipe" transactions, which often occurs in currently popular markets like Magic Eden and Unisat. Fluid prioritizes completely permissionless and secure trading at the cost of a less smooth trading experience. Fluid will launch their market in the coming weeks.

2. Saturn BTC

Website: https://www.saturnbtc.io/

Twitter: https://x.com/Saturn_btc

Saturn BTC is an on-chain trading platform based on an order book, initially launched in the summer of 2023 for rare sats (the smallest unit of Bitcoin). They have just launched the Runes trading market. They focus on creating a smooth trading experience similar to centralized trading platforms. They have a "peer-to-peer" order book where users can place limit orders on-chain to fill the order book, and users can also make market buys, 'accepting' existing limit orders on the order book. This user experience is very smooth, especially since users do not have to worry about splitting UTXOs or the exact requirements for matching orders placed by makers. This is a significant improvement over the traditional, more cumbersome Runes trading experience on Unisat and Magic Eden. Saturn also has a "swap" feature, but this is not an AMM-style liquidity pool swap. Through the swap, users simply market buy an appropriate amount of sell orders from the order book, and vice versa.

To achieve these improvements in trading experience and functionality, particularly related to limit orders and matching engines, Saturn currently requires users to "deposit" funds into a "trading account," which is a multi-signature account co-signed by users and Saturn. This "trading wallet" will be replaced by a one-time multi-signature in the next version. When users create limit orders, they sign a "Sighash None" PSBT, which technically transfers control of the specific order's tokens/Bitcoin to the Saturn platform and matching engine in a 2/2 multi-signature manner. The transaction is finalized with "Sighash All" before being broadcast to the mempool, ensuring protection against sniping. This trading process means that as long as the order remains open, traders must trust Saturn to handle the specific funds involved. Therefore, the trading experience is not completely permissionless and has some centralized aspects.

Saturn adopts an interesting and innovative approach by directly replicating the smooth trading experience of centralized trading platforms on the Bitcoin Layer 1 chain. Their platform also offers complete charting capabilities provided by Trading View. There is no need to split orders; the platform handles these transactions, and there can be partial fills and multiple wallets in the same transaction. Saturn is a very user-friendly and intuitive decentralized trading platform, with many product improvements and new features included in their roadmap.

3. UniTap

Website: https://unitap.io/

Twitter: https://x.com/Uni_Tap

Unitap is a decentralized trading platform (DEX) built for the TAP ecosystem. The TAP meta-protocol allows various DeFi functions and operations to be performed directly on Bitcoin Layer 1, utilizing distributed indexers to assist with calculations and account balances.

Unitap is building a market not only for trading Tap-based assets but also for trading Tap to Runes. They are developing a bridging solution from Runes to Tap.

Unitap has designed a completely non-custodial exchange system. Users wishing to sell tokens (e.g., -tap) can create a PSBT using "Sighash Single," specifying the amount of tokens they wish to sell and what form (token and amount) they wish to receive in return. The return can be BTC or other Tap or Rune tokens. This creates a very specific sell order, which may take some time to find a match, especially in a low liquidity market. To help overcome this friction, Unitap places this sell order into the market, matching it with other orders from buyers that fit this specific sell order. For example, if I want to sell some $-tap, I can select that token and click the "Give" tab. This will open a market containing all orders buying $-tap, where sellers of other assets are looking for $-tap in exchange for their assets (see the screenshot above). This increases market flexibility and helps facilitate quick sales that traders prefer. Currently, Tap-Tap assets are tradable, and Tap-Runes and Runes-Tap swaps will be launched in the coming months.

Unitap will also launch its own wallet in the coming weeks, supporting all TAP operations and cross-protocol swaps, such as Tap-Runes or Tap-BRC20.

4. Dotswap

Website: https://www.dotswap.app/

Twitter: https://x.com/dot_swap

Dotswap is a native AMM-style trading platform based on Bitcoin Layer 1, supporting BRC20, ARC20, and Runes. Its trading experience is very similar to how Uniswap operates. Users can already swap between BRC20/Bitcoin and Runes/Bitcoin, with Runes/Runes swaps coming soon.

Atomic swaps are completely permissionless and non-custodial, using "Sighash All" PSBT. Users choose how much Bitcoin/token they wish to swap and receive the corresponding amount of another token in the same transaction. Using Sighash-All means all transactions have resistance to snipers.

The trade-off here is that the liquidity pools are custodial. When liquidity providers deposit funds into the liquidity pool, those funds are stored in a multi-signature system, as Bitcoin does not have smart contracts to send funds to. Dotswap's unique MMM (Multi-layer Multi-signature Matrix) custodial solution is internally developed and operates in collaboration with custodians Safeheron and BitGo. The process of adding and removing liquidity is as simple as expected, similar to the experience of EVM AMMs. Dotswap is the first team on Bitcoin to implement centralized serialization to protect transaction ordering (and thus price ordering).

Dotswap has also developed a new Runes token launch platform that operates similarly to pump.fun on Solana. At launch, participants use Bitcoin to purchase specific Runes tokens, with most of the Bitcoin used to seed the liquidity pool for that token. Therefore, any Rune launched on this platform has an immediately available liquidity pool, allowing users to swap and trade in a completely permissionless manner. Contributors to the launch platform also have a stake in the liquidity pool and can earn trading fees.

Dotswap has developed a completely permissionless and non-custodial AMM trading platform for traders/swapers to use. Liquidity providers are the ones bearing the trust assumption. So far, Dotswap's trading volume has exceeded $40 million. If Dotswap successfully attracts more liquidity into their pools (through favorable trading fees, liquidity mining, etc.), trading volume should increase.

5. Ordiswap

Website: https://app.ordiswap.fi/

Twitter: https://x.com/OrdiswapLabs

Ordiswap is an AMM for swapping BRC20 or Runes tokens on-chain. Users can swap, provide liquidity, remove liquidity, and create new liquidity pools on Bitcoin Layer 1. Last year, Ordiswap was the first AMM to appear in the BRC20 space.

When users initiate a swap on Ordiswap (for example, exchanging BTC for ORDI), they create a transaction that sends their BTC to Ordiswap liquidity providers. This transaction also includes a script detailing the swap. The Ordiswap backend indexer reads this script and sends the corresponding amount of ORDI to the user in subsequent transactions. This means that users must trust the Ordiswap API when signing the transaction to initiate the swap.

Ordiswap uses a set of off-chain servers, oracles, indexers, and Bitcoin nodes to create AMM functionality. Ordiswap's servers update the off-chain balances of users participating in transactions and execute regular settlements on-chain. Currently, all swaps are handled by the Ordiswap API. This is slightly less elegant than solutions using PSBT for atomic swaps, which can complete the entire swap in a single transaction. However, atomic swaps are already on the roadmap.

The liquidity pools are again custodial, and discussions are ongoing with custodial partners about upgrading security. Their V2 BRC20 swap has been live for two months, with a total trading volume of about $500,000.

If they can achieve everything they set out to do, Ordiswap also has the potential to become a major AMM on Bitcoin. This is an ambitious, modular implementation plan for Bitcoin exchanges. They are currently in the closed testing phase of the V3 mainnet. Reports indicate that testing is progressing smoothly, and they are refining the final details of the swap mechanism.

6. RunesDex

Website: https://www.runesdex.com/

Twitter: https://x.com/RUNES_DEX

Runes Dex is another recently launched AMM on Bitcoin Layer 1 for Runes-BTC trading. They are well-funded, have a large team, and are rapidly developing. They are currently in the Alpha testing phase on the mainnet. Users can test swapping their native Rune IS•THIS•WORKING. Similar to the aforementioned AMMs, trades on Runes Dex are completely non-custodial and permissionless, but the liquidity pools are custodial. Currently, Runes Dex fully controls the private keys, which are stored in a vault using AWS. Custodial partnerships are in preparation.

They are also building a launch platform similar to pump.fun, a Runes tracker that considers pending transactions in the mempool, and a Runes bridge for bridging memecoins from other chains like Solana to Runes. They use "Sighash All" in Dex swap PSBTs, meaning each swap has resistance to snipers. They plan to allow liquidity providers to charge fees in Bitcoin. They are also creating an automatic UTXO splitter for liquidity provision to ensure a smooth experience during swaps. The AMM for Runes Dex will be fully launched in the coming weeks. Another promising AMM.

7. Runeswap --- Swapsats

Website: https://rune-testnet.swapsats.io/

Twitter: https://x.com/Swapsats_io

Runeswap, developed by the Swapsats team, is an AMM-style exchange platform for Runes-BTC, backed by the team that developed the OG sub 10k Ordinals collection Ordinal Eggs. This exchange platform will operate similarly to the aforementioned exchanges; providing a permissionless swapping experience, but the liquidity pools are custodial.

As a group of collectors, their philosophy is to build a decentralized trading platform for their community. Holders of their collectibles will receive various benefits on the trading platform, such as reduced trading fees and revenue sharing from the trading platform's income. They prioritize a smooth user interface and good user experience to further nurture their community. Currently, the exchange platform is in the alpha testnet phase, with the mainnet planned to launch in the coming weeks.

8. RunesFi

Website: https://runesfi.io/

Twitter: https://x.com/Runes_Fi

RunesFi aims to become a one-stop infrastructure hub for Bitcoin assets. They plan to build a Runes block explorer, launch platform and incubator, Runes engraver, and most importantly, a decentralized trading platform for Runes and BRC20. They are currently in the testing phase of their trading platform, with the mainnet product expected to launch before the end of 2024.

There are also other decentralized trading platforms under development that promise more decentralization than those listed above, such as Omnisats and Motoswap (OPNet). I can analyze them when they are closer to launch and more information is available. Unisat recently announced their new BRC20 swap module, which will include liquidity pools, among other features. It is currently under development and expected to be available within six months. Magic Eden is also hinting at upcoming swap features, although the timeline is still unclear.

9. Conclusion and Outlook

Building on Bitcoin is challenging, especially if trying to directly replicate the functionality of the Ethereum Virtual Machine (EVM). The UTXO model of Bitcoin differs from the account-based model of EVM, and teams that can fully leverage Bitcoin's unique mechanisms (such as PSBTs, Sighashes, etc.) are more likely to succeed in the long run than those merely attempting to recreate the EVM stack.

Teams currently creating innovative solutions are making trade-offs in different aspects. For example, in the realm of order book decentralized trading platforms, Saturn prioritizes an ultra-smooth user experience and functionality at the expense of completely permissionless trading. Fluid takes a different approach, prioritizing completely decentralized and non-custodial trading, although with some friction in the trading experience. It will be interesting to see which philosophy the market values more.

In the automated market maker (AMM) space, most teams are creating a system that allows traders to trade completely permissionlessly, but the liquidity pools use some form of custodial, multi-signature, or semi-custodial solution. This may be an acceptable compromise, as most traders do not care how the liquidity pool is set up, as long as they can swap quickly and permissionlessly. Additionally, considering how many bridges and contracts on Ethereum have been attacked, providing liquidity to reputable custodians may even be a more attractive solution. Currently, Dotswap has an advantage in this regard, as they have gone the furthest in development, product offerings, and liquidity provider custodial solutions. However, other teams like RunesDex and Ordiswap are also catching up, with their products set to launch soon.

I believe there are other teams building that I am unaware of as I write this.