TL;DR: There are now over 250 decentralized exchanges in the world today. These are the hurdles of what it will take to be #1.

Binance, the largest fee-based centralized cryptocurrency exchange by volume ($1.07b per day) recently announced its intention to get into the ultra-competitive decentralized exchange (DEX) market. Despite its size and name recognition Binance will not be the leading DEX of 2019.

Why?

Binance will certainly invite its existing user base to its new DEX to help kickstart liquidity. This will not be a competitive advantage however. The liquidity problem is already being solved today by DEX aggregators like dexdexplatform (Dexdex) Easytrade.io that pools orders from multiple DEXs. According to the site:

“Dexdex searches multiple exchanges, protocols and market makers ensuring you always get the best available price. It also provides tools for anyone to generate their own liquidity.”

Their technology is also open-source and on GitHub.

Enter the DEX Aggregators

This is important because Dexdex actually aggregates some of the orders of 0x relayers to add to its own virtual liquidity pool. 0x is a protocol for trading Ethereum (ERC20) digital tokens and assets and pooling liquidity. Many of today’s top DEXs use its technology. RadarRelay (runs on the 0x protocol) and ForkDelta are amongst its sources of liquidity. ForkDelta already gets most of its liquidity from EtherDelta.​ So Dexdex is like an aggregator of aggregators. Imagine being able to aggregate the liquidity of all DEXs. It’s not exactly a zero-sum game but an ever expanding pie:

The ultra-competitive race for the DEX market (by % of trade volume among DEXs).

Liquidity Is a Slippery Slope

The two major challenges with most DEX’s today are liquidity and UX. The DEX that will win over the masses in the next couple of years is going to be the one that has the liquidity of Binance and the UX of Coinbase. The problem is that there is a lack of standardization across DEXs — no common trading and liquidity protocol. This is the reason that most DEXs have low liquidity and volume — they simply do not share a common liquidity pool. There are many projects trying to solve this protocol problem today. The leader by number of DEX integration partners in this space currently is the 0x protocol and has a great chance of becoming that standard in 2019.

Why?

I analyzed a Github database of 258 known DEXs in existence today (yes there are 258!) and removed the 70 DEXs without a known or publicly published protocol leaving 188 DEXs. I then plotted this in the pie chart below for a better visualization. The lack of a standardized protocol for these exchanges is staggering. There are over two dozen different protocols! The leader is 0x which powers over 19% of these DEXs today:

DEXs by protocol (Source: https://github.com/distribuyed/index)

Most people don’t want to do their own due diligence when it comes to trusting the underlying settling mechanism. Trade settling is how trades are confirmed and committed to the Ethereum blockchain). 0x does this seamlessly for any of its relays that use the 0x protocol for off-chain orders. In other words instead of hundreds of future DEXs each with their own trade settlement technology the 0x protocol standardizes this “DEX-as-a-service” functionality across the board. This puts 0x in a position to be to a DEX what Ethereum is a smart contract.

The Challenges Ahead

One major challenge I see with this Dexdex/EasyTrade model is the same problem Expedia had when it became the go-to for finding the price rates on hotels. Anyone can create an aggregator but unless you have millions of dollars in marketing budget you have to add some other value otherwise anyone can become an aggregator. I believe UX will be one of several key differentiators.​ If you have never traded on a DEX its not exactly user friendly. and I would not recommend it if you’re new to the cryptocurrency trading world.

Binance will still be a formidable player however as it forays into the DEX space. It plans to monetize by owning many of the nodes that will power its own blockchain. Binance has the name recognition, marketing dollars and trust (if we can define trust being that they already process 1.4m TPS for its users).

I believe that in 2019 the DEX that pulls ahead of the pack will:

1) Aggregate liquidity.

2) Have a killer UX.

3) Be trustless.

4) Have low to no fees.

5) Have automatic order matching and instant trades.

6) Leverage network effects for growth.

0x provides that battle-tested protocol and allows the aggregation of liquidity from its relayers. This puts Dexdex (I have no stake or relationship with them) in a position to compete with any “DEX” that Binance creates granted it can get more exposure.

Many of today’s DEXs’ fees are two-fold — first a Gas fee to confirm the transaction on the Ethereum network and the DEX fee. The Binance DEX will require fees in BNB token to pay for transactions on its blockchain. ForkDelta charges .03%. Radar Relay just charges for Gas although states that it will charge fees in the future once it gets more traction.

The successful and sustainable DEX of the future will charge no user fees just as Expedia charges no user fees. Once an exchange or DEX gets enough volume new monetization opportunities will emerge. In the meantime to avoid massive Gas fees key components of the orders (bid matching, balance inquiries, transaction histories, limit orders) can be side-chained (blockchain side-chain technologies like Loom Network ZombieChain would be a great fit). Compounded with the lack of speed and functionality for advanced features such as algorithmic or bot trading most DEXs are probably not yet an option for high-frequency or day traders with more sophisticated needs than your average retail HODLer.

Its still early in the evolution of DEXs and major players such as IDEX, Komodo and Stellar are already breaking ground with clever alternative solutions such as hybrid-exchanges and atomic swaps.

Which DEX will get the lion’s share of the market in 2019? Its still a bit early in the game to tell. Tech break-thoughs in DEXs are now becoming the new normal. For now perhaps the best that we can do to predict the DEX of the future is to follow the money. Better yet follow the liquidity.