First-generation decentralized exchanges (DEXs) offered an alternative to centralized exchanges (CEXs) by permitting token swaps with zero transaction costs. However, order books were still necessary and liquidity issues continued. The automated market maker (AMM) concept resolved this issue by using liquidity pools instead of order books. AMMs provide an incentive for liquidity providers to provide token pools and collect fees produced by traders who execute swaps.
However, the market remains fragmented, with various DEXs lacking liquidity relative to their CEX equivalents. As a consequence, DEX aggregators have formed in order to consolidate this dispersed liquidity into a single platform.
Unfortunately, multichain accessibility is restricted due to the fact that DEX aggregators are largely ERC20-based and can only link to Ethereum liquidity pools. They also struggle to compete with centralized alternatives in terms of trade volume.
This has compelled Defi traders to return to several or aggregated CEX platforms in order to access a complete spectrum of tokens, negating the original aim of permissionless Defi.
Now, cross-chain DEX aggregators are developing, enabling a wide variety of token kinds, enlarging the market, and hence enhancing liquidity and trade volumes.
Workflow of Cross-Chain DEX Aggregators
DEXs and aggregators that use novel multi-chain network topologies to aggregate liquidity from several chains are referred to as cross-chain DEX aggregators. Cross-chain aggregators use the interoperability provided by this form of parachain (connected blockchain) technology to provide increased liquidity and asset diversity to the decentralized financial sector.
Cross-chain DEX aggregators use clever algorithms to determine the optimal paths for executing trade orders across diverse blockchain ecosystems. This enables aggregators to execute orders at the optimal price across several protocols, allowing consumers to immediately shift between tokens on underused networks in defi.
Importance of Interoperability in Blockchain
The feasibility of blockchain technology will be determined by the connectivity and integration of numerous blockchain networks. Therefore, blockchain interoperability refers to the concept of several blockchains talking with one another in order to ease the flow of information.
Interoperability is the capacity to see and access information across many blockchain systems. For instance, if someone transfers data to a different blockchain, shouldn’t the recipient be able to easily read, comprehend, and respond to it? However, this is currently impossible since information cannot be transferred across the Bitcoin and Ethereum blockchains.
Cross-Chain technology tries to overcome all of these problems by enhancing the interoperability of blockchains. Emerging projects are progressively embracing the notion as they attempt to establish interoperable platforms that do not need a third party.
Interoperability on the blockchain should go a long way toward removing middlemen or third parties, which are associated with centralized systems. The ability of various decentralized networks to connect with one another without the need for intermediaries ought to aid in the development of fully decentralized systems.
Decentralized finance offers an alternative to centralized infrastructure, enabling players to function freely in a permissionless economy. The introduction of cross-chain DEX aggregators advances defi toward this objective.