Decentralized exchanges (DEXs) have become increasingly popular in recent years due to their ability to give users a high degree of control over their assets and a safer trading environment than centralized exchanges.
However, one major limitation of DEXs is that they cannot support cross-chain and margin trading. There are various decentralized exchange protocols that aim to overcome this limitation by allowing DEX to support cross-chain trading, margin trading and other features.
The Injection Protocol is a decentralized exchange protocol built on Cosmos, a decentralized and interoperable blockchain ecosystem. The Injective Protocol enables DEX to support cross-chain trading and margin trading, allowing users to trade assets from different blockchain networks on a single platform.
AliumSwap is a decentralized exchange that supports multiple blockchain networks. In addition, it has a feature called Hybrid Liquidity which aims to simplify the trading process by combining it into one platform.
How can DEX enable cross-chain trading?
One of the main challenges in enabling cross-chain trading on DEX is the need to reconcile the different ledgers and order books of the various participating blockchain networks. The Injection Protocol overcomes this challenge by using what it calls a “relayer.”
Relayers are decentralized nodes responsible for facilitating the trading of assets across multiple chains. They act as intermediaries, holding assets in escrow and facilitating the exchange of assets between traders.
When users want to trade assets from one blockchain network for assets on another network, they can place an order on a DEX that uses the Injection Protocol. The relayer will then take the user’s order and send it to the appropriate blockchain network, which matches the partner.
The relayer will also facilitate the transfer of assets between the two parties, so that the trade can be completed. This process allows users to trade assets from different blockchain networks on a single platform, overcoming one of the main limitations of traditional DEX.
Eric Chen, co-founder and CEO of Injektif, told Cointelegraph, “The future of DeFi is cross-chain composability. While most financial primitives (trade, lending, borrowing, leverage, etc.) have been built on DeFi, when they are removed as standalone applications , there is still a lot to be desired.What everyone wants is DApps that can build on each other.
Latest: Crypto lender Salt returns with $64.4 million in funding
AliumSwap has started the integration of cross-chain functionality with the Polygon network, with plans to integrate OKChain in the future. To facilitate token exchange between BNB Chain and the Polygon network, users must select the chain and token to be exchanged.
Next, they need to select the Polygon network and the desired recipient token. Finally, they must enter the amount of tokens to exchange and start the transaction.
AliumSwap’s ALM token operates as a transitional asset in the token exchange process. Specifically, the exchange process involves the conversion of the original A token from the originating block into an ALM token and, subsequently, into a new B token in the target block.
Brent Xu, CEO and founder of Umee, a cross-chain DeFi hub built on the Cosmos SDK, told Cointelegraph:
“Cross-chain trading is very important, today’s blockchain is like the early internet. Back then there was only ARPANET and many unconnected intranets. It wasn’t until the invention of a protocol called TCP/IP that connected everything.
He continued: “Cross-chain trading means that all blockchain protocols can connect and communicate with each other. Side chains, layer 2, alternative language layers like Solana, Move-VM chain like Aptos, Cosmos chain, Polkadot chain. When all these can connect and trade with each other, we will have interconnected blockchains – just as we now have an interconnected internet.
Margin trading on DEX
Margin trading is a trading strategy that involves borrowing money from a broker to trade with leverage. This can allow the trader to make greater profits but also have a greater risk of loss.
Cross-chain DEXs can use decentralized lending and borrowing platforms that allow them to support margin trading. In addition, since DEX supports a larger number of tokens than centralized platforms, users can trade influence on a higher number of cryptocurrencies.
The Injection Protocol allows DEX to support margin trading by providing a decentralized lending and borrowing platform. This platform allows users to borrow and lend assets to each other, with the Injection Protocol as an intermediary.
When users want to trade with leverage on DEXs that use the Injection Protocol, they can borrow the assets they need from lending and borrowing platforms. They can then use these assets to trade on the DEX.
In the decentralized exchange ZKEX, the margin trading feature is implemented through the use of smart contracts. The contract automates the process of borrowing and lending funds, as well as calculating interest and other related costs. In addition, the platform uses zero-knowledge proof to verify transactions, which helps maintain security and privacy. This results in a safe environment for margin trading.
This allows traders to take larger positions than they would otherwise be able to do with funds. Borrowed funds can be from other users or ZKEX itself, and traders must pay interest on the borrowed amount.
Margin trading on decentralized exchanges allows traders to profit from tokens that are not listed on centralized exchanges. This process increases the number of participants in the DeFi sector and can increase liquidity, as liquidity providers will be incentivized to add tokens to pools that support margin trading. Additionally, as traders will use leverage, there will be an increased demand for liquidity.
However, some experts believe that margin trading may be difficult to execute in a decentralized protocol.
“Margin trading in DeFi is important, although it is very difficult to execute. It is common to see leverage applied to protocols like perp futures trading platforms in DeFi, although leverage is a financial primitive that is difficult to get right,” Xu told Cointelegraph.
It supports multichain decentralized exchange features
ZKEX implements zero-knowledge proof to confirm the validity of transactions on the platform. In the exchange, this cryptographic method validates the authenticity of the transaction, ensuring security and integrity while retaining personal information, including the identity of the participants or the specifics of the transaction.
Integrating zero-knowledge proof increases the security and privacy of the platform and contributes to building trust and confidence among users.
Strategy Token is another feature of the Injective-based DEX that allows investors to participate in actively managed algorithmic trading strategies developed by top institutions by holding tokens, which represent shares in the trading vault.
The assets in the portfolio are then managed by smart contracts, which can perform transactions based on predefined rules or external factors, such as the price of Ether (ETH). For example, smart contracts can execute transactions based on the fact that Ether has increased in value.
“Bringing active portfolio management and yield optimization strategies to DeFi is no small feat. The ERC-4626 token standard solves a major UX hurdle by allowing Sommelier [a DeFi platform that issues the token] to mark the ‘shares’ in the strategy as Strategy Tokens,” Chen told Cointelegraph, continuing:
“Investors can simply buy and hold these Liquid Strategy Tokens on a decentralized exchange to gain exposure to a given strategy and then sell when they’re ready to exit. It’s non-custodial active management that’s easy to understand and participate in.”
Unlike more traditional methods of investing in funds, all transactions using this technique can be viewed in detail on the Ethereum blockchain. In addition, users always have full command of their possessions and assets. For example, they can exit the scheme by selling the Strategy Tokens they have collected.
AliumSwap has a unique liquidity feature known as Hybrid Liquidity. This system enables decentralized automated market maker exchanges to provide users with multi-chain options and cross-chain features. The Hybrid Liquidity feature combines liquidity from centralized and decentralized exchanges accessed through a liquidity aggregator.
A liquidity aggregator is software that allows users to access a pool of buy and sell orders from multiple liquidity providers simultaneously.
New: Crypto and securities: The new interpretation of the US Howey test gained ground
Aggregators provide near-market average prices for traders to buy or sell assets by adjusting price flows to meet their needs using computer algorithms.
If the price impact for the selected pair exceeds 5% or there is no liquidity pool on AliumSwap, liquidity pools from other exchanges are used to provide the best price with minimal slippage for traders.
The decentralized nature of the multichain DEX provides users with a more secure and transparent trading environment. Additionally, as decentralized exchanges continue to grow, multichain DEXs may play an important role in allowing other decentralized exchanges to offer a more comprehensive range of features and services.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making decisions.