Why Defi Needs Cross-Chain DEX Aggregators

This post was originally published on Polkaswitch

First-generation decentralized exchanges (DEXes) provided an alternative to centralized exchanges (CEXes), facilitating token swaps with minimal fees. Order books were still required, however, and liquidity problems persisted. The automated market maker (AMM) model then fixed this problem by using liquidity pools rather than order books. AMMs offer liquidity providers an incentive to supply token pools and collect fees generated by traders who execute swaps.

The marketplace remains fragmented, however, with liquidity still lacking on individual DEXes compared to their CEX counterparts. As a result, DEX aggregators have emerged to pool that fragmented liquidity together into a single platform to solve the problem.

Unfortunately, multi-chain accessibility is limited as DEX aggregators are predominantly ERC20-based, only able to connect to liquidity pools on Ethereum. They also struggle to compete in terms of trading volume compared to centralized alternatives.

That has forced defi traders to return to multiple or aggregated CEX platforms to access a full range of tokens, defeating the purpose of permissionless defi in the first place.

Now, cross-chain DEX aggregators are emerging, supporting a broad range of token types, expanding the available market, and increasing liquidity and trading volumes as a result.

How Cross-Chain DEX Aggregators Work

Cross-chain DEX aggregators build on the development work of the DEXes and aggregators that came before and leverage new multi-chain network architecture like Polkadot to pool liquidity from not just one blockchain but many. Cross-chain aggregators harness the interoperability that this type of parachain (connected blockchain) infrastructure provides, introducing greater liquidity and asset variety to the decentralized finance space.

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Cross-chain DEX aggregators deploy intelligent algorithms to identify the best routes to fulfill trade orders across different blockchain ecosystems. This allows aggregators to execute orders at the best price across multiple protocols, enabling users to instantly swap between tokens on different networks that are currently underutilized in defi.

Several cross-chain DEX aggregators are now being developed on Polkadot, Avalanche, Binance Smart Chain, xDai, Fantom, Polygon, and many other smart contract networks and layer-twos.

Cross-Chain Comes to Polkadot

Polkaswitch is a decentralized, cross-chain liquidity pool that will enable traders to swap between Polkadot and Ethereum-based tokens, with more blockchains to come. It unlocks and aggregates frictionless liquidity from multiple chains, delivering the best prices via one platform and using smart contracts to execute transactions. Polkaswitch’s 100% trustless and non-custodial nature means that only users have access to their crypto assets, and the platform will be as easy to use as connecting a MetaMask wallet.

Utilizing smart contracts, relayers, and network bridges, the Polkaswitch protocol navigates multiple liquidity sources per token pair. Every liquidity source has its own algorithm and Polkaswitch will fill the order using the best offers received from liquidity sources available across the top DEXes on different blockchains such as Uniswap, Sushiswap, and Acala, allowing traders to capture value cross-chain.

Polkaswitch works in collaboration with Moonbeam, an Ethereum-compatible smart contract parachain on Polkadot, to deploy contracts and manage cross-chain communication through native Polkadot compatibility or bridge-based integrations. Leveraging Moonbeam’s protocol will grant Polkaswitch early entry to Polkadot’s rapidly expanding ecosystem, becoming a first-mover among cross-chain DEX aggregators.

The benefits of cross-chain DEX aggregation will allow Polkaswitch to keep fees low, payable in SWITCH tokens. SWITCH will then be used for treasury management and utility requirements, allowing holders to participate in staking to receive reduced trading fees and staking rewards, as well as governance of the platform by voting on key community decisions.

Polkaswitch has laid out a roadmap to deliver testnet and token functionality in Q1/Q2, followed by contract and cross-chain security audits, Ethereum bridge integration, and beta testing, with the mainnet and final product launch set to complete by Q3.

Decentralized finance promises an alternative to relying on centralized infrastructure, allowing participants to operate freely in a fully permissionless ecosystem. The emergence of cross-chain DEX aggregators brings defi one step closer to that goal.

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