Decentralized exchanges (DEX) have become increasingly popular in recent years due to their ability to offer users a high degree of control over their assets and a more secure trading environment than centralized exchanges.
However, a major limitation of DEXs is their inability to support cross-chain and margin trading. There are many decentralized exchange protocols that aim to overcome this limitation by allowing DEXs to support inter-chain trading, margin trading and other functions.
Injective Protocol is a decentralized exchange protocol based on Cosmos, a decentralized and interoperable blockchain ecosystem. The Injective Protocol enables DEXs to support cross-chain trading and margin trading, allowing users to exchange assets from different blockchain networks on a single platform.
AliumSwap is a decentralized exchange that supports multiple blockchain networks. Additionally, it has a feature called Hybrid Liquidity that aims to simplify the trading process by consolidating it into one platform.
How can DEXs enable cross-chain transactions?
One of the key challenges in facilitating inter-chain transactions in a DEX is the need to harmonize the different ledgers and order books of the various blockchain networks involved. The Injective Protocol addresses this challenge by using what it calls “retransmitters”.
Relays are decentralized nodes responsible for facilitating the trade of assets across different chains. They act as intermediaries, holding assets in escrow and facilitating the exchange of assets between traders.
When a user wants to exchange an asset from one blockchain network for an asset on another network, they can submit an order to a DEX running on Injective Protocol. The relay will then receive the user’s order and send it to the appropriate blockchain network, which matches it with a counterparty.
The relayer will also facilitate the transfer of assets between the two parties, allowing the transaction to be completed. This process allows users to exchange assets from different blockchain networks on a single platform, overcoming one of the major limitations of traditional DEXs.
Eric Chen, co-founder and CEO of Injective, told Cointelegraph, “The future of DeFi is the possibility of cross-chain composition. While most financial primitives (trading, borrowing, lending, leverage, etc.) have been built into DeFi, when characterized as standalone applications, so much is left to be desired. What everyone wants is DApps that can build on each other.”
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AliumSwap has begun integrating its cross-functionality with the Polygon network, with plans to integrate with OKChain in the near future. To facilitate token exchange between BNB Chain and the Polygon network, the user must first select the chain and token to exchange.
Next, they must select the Polygon network and their desired download token. Finally, they need to enter the number of tokens to exchange and start the transaction.
AliumSwap’s ALM token acts as a transitional element in the token exchange process. Specifically, the exchange process involves a conversion of the original A token from its original blockchain to the ALM token and then to the new B token on the target blockchain.
Brent Xu, CEO and founder of Umee, a DeFi cross-hub based on the Cosmos SDK, told Cointelegraph:
“Cross-chain trading is very important, blockchains right now are like the early Internet. Back then there was only the ARPANET and a bunch of unconnected intranets. It wasn’t until a protocol called TCP/IP was discovered that tied everything together.”
He continued: “Cross-chain trading means that all blockchain protocols can connect and interact with each other. Side chains, 2 layers, alternate base layers like Solana, Move-VM chains like Aptos, Cosmos chains, Polkadot chains. When all these things can be connected and transacted with each other, we will have an interconnected blockchain — just like we have an interconnected internet today.”
Margin trading on DEX
Margin trading is a trading strategy that involves borrowing money from a broker for leveraged trading. This can allow traders to make bigger profits, but it also carries the risk of more significant losses.
Cross-chain DEXs can use a decentralized lending and borrowing platform that allows them to support margin trading. Additionally, since DEXs support a larger number of tokens than centralized platforms, users can trade leveraged in a higher amount of cryptocurrency.
The Injective Protocol allows DEXs 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 Injective Protocol acting as an intermediary.
When users want to trade with leverage on an Injective Protocol-powered DEX, they can borrow the assets they need from the lending and borrowing platform. They can then use these assets to trade on the DEX.
In the ZKEX decentralized exchange, the margin trading function is implemented through the use of smart contracts. These contracts automate the process of borrowing and lending funds, as well as the calculation of interest and other related charges. Additionally, the platform uses zero-knowledge proofs to verify transactions, which helps maintain security and privacy. This results in a safe environment for margin trading.
This allows investors to take larger positions than they could with their own funds alone. Borrowed funds can come from other users or from ZKEX itself, and the trader must pay interest on the amount borrowed.
Margin trading on decentralized exchanges allows investors to profit from tokens that are not listed on centralized exchanges. This process increases the number of participants in the DeFi sector and can improve liquidity, as liquidity providers will be incentivized to add tokens to pools that support margin trading. Additionally, since traders will be using leverage, there will be an increased demand for liquidity.
However, some experts believe that margin trading can be difficult to execute in decentralized protocols.
“Margin trading in DeFi is important, although very difficult to execute. It is common to see leverage being developed for protocols like perp futures trading platforms in DeFi, although leverage is a difficult financial primitive to get right,” Xu told Cointelegraph.
Supporting features of decentralized multi-chain exchanges
ZKEX implements zero-knowledge proofs to confirm the validity of transactions on its platform. In exchange, this cryptographic method authenticates transactions, ensuring their security and integrity, while withholding any private information, including participant identities or transaction specifics.
The integration of zero-knowledge proofs enhances the security and privacy of the platform and helps build trust and confidence among its users.
Strategy Tokens are another feature of Injective-based DEXs that allow investors to participate in actively managed algorithmic trading strategies developed by leading institutions by holding the tokens, which represent shares in trading vaults.
The assets included in these portfolios are then managed by smart contracts, which may trade based on predetermined rules or external factors such as the price of Ether (ETH). For example, smart contracts may execute transactions based on the fact that Ether has increased in value.
“Transferring active portfolio management and performance optimization strategies to DeFi is no small feat. The ERC-4626 token standard solves a key UX hurdle by allowing Sommelier [a DeFi platform that issues the token] to tokenize ‘shares’ in strategies 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 are ready to exit. It’s simple to understand and engage in active stewardship without custodial.”
Unlike more traditional means of capital investment, all transactions using these techniques can be viewed in full detail on the Ethereum blockchain. In addition, users always have full control over their assets and assets. For example, they may exit the scheme by selling the Strategy Tokens they have accumulated.
AliumSwap has a unique liquidity feature known as Hybrid Liquidity. This system enables the decentralized automated market maker exchange to provide users with multi-chain options and multi-chain functionality. The Hybrid Liquidity feature combines liquidity from centralized and decentralized exchanges accessed through liquidity aggregators.
A liquidity aggregator is a software tool that allows users to access a pool of buy and sell orders from multiple liquidity providers simultaneously.
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Aggregators provide an average near-market price for traders to buy or sell an asset by adjusting price streams to meet their needs using computer algorithms.
If the price impact for a selected pair exceeds 5% or there is no such liquidity pool on AliumSwap, the liquidity pool of the other exchange is used to provide the best possible price with minimal slippage for the trader.
The decentralized nature of DEX multichains provides users with a more secure and transparent trading environment. Additionally, as decentralized exchanges continue to grow in popularity, multichain DEXs are likely to play an important role in enabling other decentralized exchanges to offer users 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 conduct their own research when making a decision.