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OAX, a Hong Kong-based decentralized trading platform, announced last Friday they had successfully deployed a new scaling protocol which, they claim, enables it to handle 1,000 transactions per second (tps). Still in testnet, they argue this will improve DEX usability and hopefully facilitate mass adoption.

Wayland Chan, Director of Technology at the OAX Foundation, explained one of the key roadblocks preventing traders from using DEXs was scalability. Most operate completely on the blockchain – order book and all – placing limitations on their performance. “Our internal research team found that pretty much all DEXs had the same offering”, Chan said on the phone. “[But] the feature and functionality were limited by the blockchain”.

Looking for a solution, OAX developers explored means to improve performance. They settled on state channels. Transactions between two parties take place off-chain and eventually settle on the blockchain; making trades faster and cheaper as well as removing the strain on the network, thereby improving performance for all users.

About a month ago this was still an unproven concept for OAX. Chan admits it took “a lot” of research and development. But in December they tested the layer 2 protocol on a local network; it had a throughput of 1,000 tps on a single node. He explained that scalability will increase as more nodes join the network.

Chan said. “We have designed the system to scale horizontally and although increases won’t be linear – 10 nodes doesn’t necessarily mean 10,000 tps – this was still a huge breakthrough”.

Now deployed onto a testnet, OAX’s next priorities are to identify any defects or bugs in the protocol and start talking to potential business partners. Chan said they were already in discussions with centralized exchanges – who he wouldn’t name – that may use OAX for a decentralized trading platform.

DEX mass adoption still out of sight

Decentralized exchanges give users autonomy over their assets. Unlike their centralized equivalents, there’s no exchange wallet, minimum deposits or withdrawal restrictions; users hold, and are responsible for, their own cryptocurrencies.

With no single point of failure, users are better-protected against hackers. Thefts, like the recent one on Cryptopia, simply can’t happen on a DEX.

The problem is many are slow and expensive. Without a central server or enough users, most suffer from liquidity issues. This acts as a Catch-22: user experience would be improved by more users, but it’s hard to attract more users with poor UX.

IDEX is currently the largest DEX. Statistics site Etherscan found IDEX accounted for more than 55% of all transactions made on a DEX in the past seven days.

Sizeable. But in comparison to the trading volumes of the centralized exchanges, IDEX, not to mention other DEX’s, are minnows. Whereas roughly $540,000 went through IDEX in the past 24 hours, $430M went through OKEx and $490M went through Binance, in the same timeframe.

Removing one of the roadblocks

Exchange development took a backseat in 2017 when the sector experienced significant growth in users. Now that the bubble has burst, Chan believes it’s time to build trading platforms without centralized intermediaries, antithetical, in his opinion, to the whole purpose of the blockchain.

This echoes views voiced by Ethereum (ETH) founder, Vitalik Buterin, who criticized the power centralized exchanges had in determining which coins are successful, “I definitely personally hope centralized exchanges burn in hell as much as possible.”

There’s more that needs to be done. Users are often uncomfortable remembering a string of random words as a private key. Chan believes this can be simplified.

But Chan believes the layer 2 protocol removes one of the major roadblocks preventing mass adoption for decentralized exchanges. Better scalability would attract more users, which by increasing liquidity would improve the overall user experience.

If all goes according to plan, Layer 2 may become the DEX equivalent of the lightning network.

The author is invested in digital assets, including ETH which is mentioned in this article.

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