Rise of the DEX
Decentralized exchanges (DEXs) are a hot topic; And rightfully so, as in late 2020, Uniswap flipped major U.S. centralized exchange (CEX) Coinbase in volume for the first time in history. Note that this explosive growth basically occured in just a single year and the vast majority of crypto users have yet to interact with decentralized finance, of which DEXs are a subset.
Needless to say, the DEX space is growing, fast. But, as the space is booming and more people are jumping in, competition and innovation are heating up as well. We briefly go through some of the basics and history below, before getting to the differentiators.
In the new standard that Uniswap established, most DEXs are built around the same set of core principles:
- KYC-less (No need to submit Identification Documents)
- Non-custodial (The exchange does not hold your crypto for you)
- Permissionless token listings*
- Permissionless liquidity provisioning
- Passive income for liquidity providers (LPs)
- Passive income for exchange token holders*
*= Do not currently apply to all, as different DEXs are in different stages of development and decentralization.
Old vs new
The first generation Ethereum-based DEXs were order book-based types, just like your regular CEX. These looked and functioned roughly the same, too. Just slightly more complicated and burdensome.
The current generation of DEXs replaced the order book mechanism with, what´s called, Automated Market Makers (AMMs). These are nothing more than smart contracts that let you buy and sell into pools of on-chain tokens/liquidity directly.
Current generation DEX user-experience has improved so significantly, that it is now actually easier and simpler to use than a typical CEX. This explains, in part, them exploding onto the scene so rapidly.
Non-aggregators vs aggregators
Furthermore, we can categorize DEXs into non-aggregators and aggregators:
- Non-aggregators build, and draw from, their own token/liquidity pools
- Aggregators route orders through, and draw from, other pools
Uniswap is an example of a non-aggregator, or a ‘regular’ DEX. Tokens are listed, and liquidity is pooled, directly on the exchange itself.
Matcha is an example of an aggregator. It finds the most efficient path for a swap, sourcing liquidity from multiple DEX pools. Tokens can not be launched or listed on the exchange itself.
DODO (token: $DODO) is a special kind of DEX in this regard, as it functions both as a ‘regular’ DEX, as well as an aggregator. Basically, a ‘one-stop-shop’ combining:
- The aggregators’ liquidity sourcing and cost-efficient swaps to attract traders.
- The DEXs’ native liquidity pools to attract LPs.
More trades from traders result in more fees for LPs, resulting in more LPs, resulting in cheaper trades, resulting in more traders, and so forth. Noteworthy is the additional ability to launch/list tokens and provide initial liquidity accordingly, offering further opportunities to traders and LPs alike.
But there is a secret sauce…
While the DEX and (aggregators’) aggregator form a synergistic combination for traders and LPs alike, there are other, important usergroups left to attract. DODO plans to serve them all. The ideal DEX userbase would look something like this:
- Market makers (MMs)
- Projects (token launches)
- Exchange token holders
In the DEX space, some of these users may be more obvious than others. For example, MMs are standard participants on your typical order book CEX, but not so much on AMM DEXs. We’ll understand why, later. Note we touched on the two most obvious groups first. Learn how DODO uniquely tries to satisfy all five usersets further down.
Currently, the only other DEX that supports native liquidity pooling besides DODO that’s also an aggregator is 1inch. Except DODO integrated both leading aggregators 1inch and 0x (On which aggregator Matcha is built) routing, next to its own routing algorithm for its own liquidity pools. This basically turns DODO into a DEX aggregators’ aggregator (or super aggregator, if you will).
Currently, the standard metrics to ´rank´ DEXs by, is through daily trading volume and total value locked (TVL). Not surprisingly, both metrics put Uniswap comfortably at the top. However, there´s a catch.
Daily trading volume obviously is pretty straightforward, but TVL is another story. According to this metric, DODO comes in at 11th. Nothing special, as DODO is a new and upcoming exchange, and growth is to be expected. However, none of these metrics actually measure how efficiently DEXs put their TVL to work.
In case you missed it, there are massive liquidity mining incentive schemes launched by these DEXs. Here, LPs are rewarded with tokens as they provide liquidity. So, they attract more and bigger LPs. This increases TVL, hence the huge TVL numbers for the leading exchanges. This is seen as a metric of ‘success’, where the top ranked exchanges are the ‘best’. But is that so?
Why go on an all-out exchange token inflation war with one another in order to attain the highest TVL? Because these exchanges *need* the extreme TVL. Without it, they can’t support their high daily trading volumes. This is because their AMM model limits them in putting their TVL to work efficiently.
Lets measure daily trading volumes directly against TVL to get a glimpse of this, and name this metric ‘capital efficiency’ (CE):
$13,417,101 / $14M = 9.9 CE #1 DODO
$953,439,404 / $2.37B = 0.4 CE #2 Uniswap
As of 01–01–2021
This simple calculation shows DODO is currently putting its TVL to work more much more efficiently than market leader Uniswap. Effectively, it’s putting close to 100% of capital locked to ‘work’. Now lets compare the top 3 exchanges by TVL with DODO this way:
9.96 CE #1 DODO
0.40 CE #2 Uniswap
0.38 CE #3 Sushiswap
0.13 CE #4 Curve
As of 01–01–2021
We can see that, if exchanges were ranked by capital efficiency, DODO would top the list by a mile. As a side effect, this also removes the need for heavy liquidity incentivization schemes causing high exchange token inflation rates. As we can tell, daily trading volumes and TVL don’t tell the whole story. In fact, they can be misleading. DODO doesn’t need to top the TVL charts to equal (or surpass) top trading volume, nor doesn’t need the inherently high token inflation rates in order to sustain it. It packs a bigger punch per $, with less side effects.
PMM: The next-gen AMM
As discussed, AMM’s form the basis of the current DEX standard. They improved upon many of the earlier order book DEXs’ weak spots, and enabled the evolution from being impractical and cumbersome, to beating Coinbases’ daily trading volume and topping 1 million users. But it doesn’t end there. CEXs are actually still better at some things that AMM DEXs haven’t been able to replicate or improve upon yet. DODO aims to solve for this through a novel innovation, called the Proactive Market Maker (PMM).
As demonstrated, DODO is able to put out a much higher daily trading volume per $ TVL (a higher CE). This is because AMMs have a small ´liquidity window´. The workable liquidity sits around the sweet spot where the market price of an asset meets the AMM price curve. All the liquidity pooled just outside of that tiny window, won’t be tapped into because it deviates from the market price too much. This leaves a big portion of TVL just sitting there.
In reality, much of the massive TVL we’re used to measuring as success, is actually rendered useless, fueled by exchange token hyper inflation to offset an inefficient liquidity model.
DODOs’ PMM works differently. It flattens the curve around the market price to significantly widen the liquidity window, and dynamically adjusts it to current market price. Thus, a much higher percentage of liquidity is allocated around market price at any time, putting much more of that TVL to work, requiring less of it.
The DODO team has calculated that the PMM needs just 10% of Uniswaps’ TVL in order to be able to put out equal amounts of trading volume.
Order book CEXs work in a similar fashion, where human market making naturally concentrates liquidity around market price (people want their bids to hit). This is why order book CEX liquidity is still more efficient than AMM DEX liquidity to this day. DODO takes the best of both worlds, with some added improvements, and combines them into the next generation DEX.
Staking & liquidity mining
Liquidity mining is popular. Here, tokens are awared to LPs as they provide liquidity. And as we learned, AMM DEXs need lots of that. This has proven so powerful, that Sushiswap managed to drain Uniswap liquidity significantly when they announced their liquidity mining programme. This forced Uniswap to respond, who then rushed to launch their own. As a result, we’ve seen one DeFi project after the other try to lure in peoples’ liquidity by offering ever increasing token returns on mining programmes, causing severe token hyperinflation.
DODO doesn’t need these extreme programmes or token hyper inflation. It is capital efficient, and doesn’t rely as much on TVL. This leaves room for DODO to offer higher returns to users, while having less token inflation. This includes staking, where users can simply buy and stake $DODO to earn more. This also includes market-beating interest on stablecoins, as well as market beating trading fees.
But the liquidity mining innovations don’t end there. A typical AMM DEX suffers from two major LP bottlenecks that DODOs’ PMM also solves:
- To provide liquidity for a trading pair, an LP has to provide for both ends of the trade. This means, for example, providing for ETH as well as USDT. In equal amounts. This means forcefully having to sell half your ETH, just to be able to provide liquidity for a single trading pair.
- This can then lead to several imbalances and losses. Such as ending up with less of the asset you prefer to keep, and more of the asset you preferred not to keep. Or lack of upside when the asset you were forced to sold half of, skyrocketed. This is also called ‘impermanent loss’ (IL).
With DODO, an LP only has to provide liquidity for one token at a time, effectively minimizing IL along with it.
Yet another groundbreaking consequence is that DODO interlinks all these single-asset pools, to enable any type of direct token swap. This removes the need for the expensive ‘coin hopping’ of a typical AMM DEX to complete a swap when a direct pair is not available.
Market makers fill an important role in the crypto markets. They add order book depth and liquidity as they strive to profit off of bid-ask spreads, while reducing slippage. It is estimated that they make up for a large part of daily trading volumes. They can jumpstart an assets’ market, provide sufficient liquidity for bigger parties to buy in, or have a smaller market dry up completely.
But the tinier the liquidity window, the less potential revenue for market makers. This makes AMM DEXs less interesting, while these need market makers the most due to their sub-optimal liquidity model. On top, institutional market makers are expensive, and because AMM DEXs need to incentivize LPs as much as possible, DEX teams might not be able to afford them. Nor may the traded assets’ own dev teams.
On the other hand, DODOs’ PMM works similar to order book CEXs, where market makers operate on a daily basis. This makes it easy for them to deploy their traditional market making strategies. DODO is less dependent on market makers through its superior liquidity model, while market makers might be attracted to it naturally because of it.
DODO will soon feature extensive customizability for market makers to expand even further on its unique offerings for (instutitional) market making
DODOs PMM leverages oracles to fetch market prices. It then dynamically concentrates liquidity around this market price accordingly. This offers super liquidity at every price level, but limits it in functioning as a source for a price oracle itself. AMM DEXs have pre-set pricing curves, functioning as ‘price discovery mechanisms’. This allows them to offer their pricing data to oracles, but they suffer from non-optimized, passive liquidity.
The PMM is flexible, however, and can eliminate oracles as a price source for assets. This allows it to act in the same way as an AMM, except it keeps its dynamically concentrating liquidity properties. It just replaces the oracle price source with a pre-set pricing curve. Meaning, the PMM can be easily adjusted to function as a price discovery mechanism and a price sources for oracles, just like regular AMMs. But better.
As we’ve discussed many of DODOs perks by now, its also interesting to look at its implications for so-called ‘long-tail assets’. Basically, these are all the crypto assets that fall out of the top liquidity and popularity rankings. Together, these make up a larger portion of the market than one might expect. No wonder, with well over 8000 unique cryptocurrencies, and new tokens being launched each day.
However, although their combined total market value may be rather high, their individual liquidity is often low to very low. Meaning all this value is just sitting there and can’t be used or exchanged efficiently. DODO can help unlock this value by interconnecting and liquidizing their markets, putting potentially billions of additional market share to work.
Token launches (IDOs)
DODOs´ liquidity perks for long-tail assets apply to project token launches too. These often suffer from the ´chicken and egg´ problem, where a newly launched asset has little liquidity, and traders can´t or won´t buy an asset untill its more liquid.
Because DODO offers supreme liquidity on its own and the PMM suits market makers much better than AMMs, DODO may especially be of interest for new token launches, when liquidity is a big bottleneck.
This token launch package is dubbed the ´IDO´. Much like ICOs and IEOs of the past, but super liquid and instantly interconnected with a massive collection of other token liquidity pools, instantly swappable for anything else and vice versa.
DODO V2: What‘s next?
Now we covered some interesting aspects of DODOs current incarnation, lets take a look at what’s next. DODO v2 is scheduled to launch as soon as this month (January 2021), and is poised to bring yet another set of amazing features. This time, including for $DODO holders.
DODO v2 is set to become a one-stop trading and token issuance platform, uniquely catering to all of the 5 usergroups we discussed earlier. Simultaneously, without sacrificing one for the other. On top, it has clever ways built-in to synergize this complete user eco-system coming together.
AMM DEXs are unable to do this, as they have to sacrifice exchange token holders for TVL and LPs, and the other way around. Plus MMs were hardly in the picture at all. So, lets take a quick look at some exciting features:
1. DODO Vending machine
With this product, the PMM gives the market pricing power to takers. Makers have no control over the token price discovery.
This makes it attractive for individuals to participate in market making, and so attracts organic market making liquidity more quickly for newly launched assets.
2. DODO Private pool
Set of customizable parameters for experienced market makers. Private pool liquidity belongs to market makers and is in full control by them.
This should be of interest to traditional, institutional and/or experienced individual market makers. These want the highest degree of freedom and customizability possible to execute their own market making strategies.
3. DODO Crowdpooling
Fair token launches without front-running and instant, organic market making. Token sale investors receive their reserved tokens upfront for a universally agreed upon price. Only after this step, the tokens’ markets open.
This should be an optimal token launch strategy for both project teams and traders. Typical AMM DEX front-running is eliminated, and organic market making ensues as a result.
4. Cheaper gas
Lower gas costs compared to the competition. Gas costs for DEXs have risen so fast lately, that DEXs have started to become unusable for an ever larger growing group of users. DODO optimized their code to the point it beats market leader Uniswaps in lowering gas fees.
Start of the gradual rollout of DAOs and $DODO token holder incentives. Untill now, the only incentive to buy and hold $DODO was to speculate on a price increase. 3 seperate DAOs will be introduced, each DAO directing the course of another specific element of the DODO platform. This includes voting on fees collected from the DEX by $DODO holders. Additionally, a ‘membership system’ and community treasury are expected.
This further decentralizes the DODO platform, introduces utility for $DODO and incentivizes token holders to collect additional tokens and participate.
DODO are a relatively new team and product in the DEX space, who have remained largely unnoticed to the average crypto investor as of yet. But they ship updates fast and seem to be ahead of the competition, coming up with genuinely powerful innovations and features. DODO is arguably the only DEX concept at this point that might succeed in appealing to all 5 types of DEX users, equally. Trumping the competion in each segment. This makes it hard to believe DODO won’t manage to gain market share over most of their competitors. Their products and roadmap are well thought out and all seems to come together in the upcoming v2 launch and take the DEX and liquidity wars straight to the current market leaders.
DODO investors include:
- Coinbase Ventures
- Binance Labs
- Framework Ventures
- DeFiance Capital
- SevenX Ventures
- Alexander Pack
- Robert Leshner (founder of Compound)
- Bobby Ong (founder of Coingecko
- Jason Choi
- Spencer Noon
- Maple Leaf Capital
DODO succesfully raised $5 million in VC capital.
As of January 5th 2020, $DODO sits at $0.28 with a $7.7 million circulating supply market cap.
$DODOs’ price has increased a little over 50% over the last 30 days.
How to buy
$DODO hasn’t listed on any A-tier CEXs yet and most of its trading volume comes from the DODO DEX itself. Buy and sell $DODO here: