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Exclusive Alex Wearn Addresses DEX Issues With Hybrid Liquidity Solution

5 mins
20 May 2021, 15:00 GMT+0000
Updated by Leila Stein
20 May 2021, 15:00 GMT+0000
In Brief
  • BeinCrypto spoke to IDEX CEO Alex Wearn about the exchanges novel hybrid liquidity solution.
  • Wearn and his team have been working to smooth out the DEX rough edges.
  • Wearn's hybrid liquidity combined AMM and order books to address exchange pain points.
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BeinCrypto spoke to Alex Wearn, CEO of IDEX about his exchange’s novel solution to common DEX issues. The decentralized exchange combines the user experience of a centralized exchange with the ownership that DEX’s ensure.

Wearn has been part of the crypto space since 2012, and like most people, started off in a centralized exchange. However, the security and ownership issues that plague these kinds of third-party exchanges soon became apparent.

“My co-founder actually had some funds on the Mt. Gox exchange and lost those in 2014 with the big hack there, and that pointed out an obvious kind of glaring issue within the cryptocurrency space,” explains Wearn.

These hacks are not uncommon or only found in the earlier years of cryptocurrency. Recently, Thodex, a trading platform in Turkey, made off with millions of dollars defrauded from customers.

In response to these kinds of issues, Wearn and his co-founder turned to decentralized exchanges, where users control their crypto rather than leaving them in the hands of a custodian.

“There are a lot of challenges when it comes to both usability and performance.”

It’s not secret that decentralized exchanges face significant issues when it comes to fees and orders.

Operating on a decentralized exchange is not simple. There are multiple challenges, including high latency, failed transactions, and liquidity shortages.

“Because there’s no process by which transactions are ordered, you’re just submitting transactions directly to the network and waiting for them to get mined, there’s a whole host of issues that can pop up that are not very user-friendly. Things like getting front-run means another transaction is inserted in front of yours in order to give the user a worse price,” explains Wearn.

“That increases the cost of these transactions and can, in the worst cases, result in what’s known as a failed transaction where users actually spend money to have the blockchain network attempt to process a transaction, but it’s unable to go through.”

Failed transactions are a big concern. Research from Dune Analytics finding 2-5% of transactions on Ethereum-based DEXs failing due to complications.

Alongside this, the user experience on these exchanges is often lacking. Centralized exchanges have the benefit of applying simple transaction methods because of their custodial nature. This means anyone can simply download the app and press “sell” or “buy” because the exchange runs the orders for you.

Finding the balance

Wearn and his platform IDEX is attempting to address these issues through its hybrid exchange design. The exchange takes the best features from centralized exchanges without compromising the ownership inherent to a DEX.

“It’s about finding a balance between giving users access to some of the technology that blockchains bring while also shielding them from some of the challenges and technical hurdles that come from interacting with the technology.”

On the UI front, the exchange is confident in its inclusion of more polished features. It even states on its website: “You’ll wonder if it’s really a DEX.”

However, the platform’s most recent and bold attempt to address key issues is through the recently unveiled Hybrid Liquidity. The team plans to roll out this new product near the end of June but is already showcasing its promise.

This project combines an order book and trading engine with liquidity pools of an automated market maker (AMM). It aims to help avoid issues like front-running and failed transactions.

“Users will be able to see the liquidity, from the liquidity pool represented on an order book kind of view, and there’ll be able to trade directly against that liquidity as well as by staying like limit orders, stop loss, other order types that are traditionally not available within the AMM,” says Wearn.

“So it’s kind of achieving a balance where we’re bringing in some elements of blockchain.”

Creating order, removing competition

Wearn explains that this hybrid model works through prioritization and removing opportunities that could harm the average user.

“The big difference will be that we have an off-chain matching engine that prioritizes and routes transactions in the same order in which they’re received. What this means is that users are no longer competing against one another to try to be the first transaction into the AMM. It proceeds in a more orderly and fair fashion similar to what you would expect on a traditional exchange.”

“So you have this nice blend of user experience where, for example, trades will execute immediately without risk of failure and without any high slippage or potential for front-running, but you still have the decentralized nature of AMMs in terms of smart contract-based custody and smart contract-based market making and liquidity pools,” he explains.

Wearn believes that this will address pain points for both AMM users and order book traders. “It will give them a deeper liquidity solution by integrating with liquidity pools. So we think it’s going to bring something for both sides of the market in terms of those participants,” he says.

“Still under development”

For Wearn, the DeFi space is still under development, with many involved brought in because of the current speculative interest. However, he doesn’t consider this a bad thing.

“It’s leading to an explosive amount of growth, a ton of funding for new teams, all of these which are going to lead to bigger and better platforms that can serve users who maybe aren’t as technologically savvy or willing to jump into this kind of head first.”

Wearn believes that building a space for those who aren’t DeFi experts is a multi-step process.

“There are really two components to getting users off of centralized exchanges. There’s building the architecture that will allow them to replicate whatever trading experience they’re used to and they desire but in a decentralized manner. Then there’s also getting them comfortable and giving them the tools to manage the custody aspect in a way that is safe and secure.”

Alongside this, Wearn considers the improvements in base-level functionality a great launching point for the next development steps.

“I think maybe what maybe what excites me about DeFi right now is, so we’ve seen the last year, two years, really the explosion of kind of the base-level functionality of finance but replicated in the smart contracts,” he says.

“We’re really kind of recreating a lot of the building blocks of the traditional finance world but in this parallel purely digital ecosystem.”

“Now that this foundation is laid, there is an opportunity for new systems to be built on top of it, that combines these in creative and previously not possible ways.”


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