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Why Decentralized Exchanges are Important on the Cardano Blockchain?

Decentralized Exchanges have gained popularity in the year 2021. This year, too, that number is only going to increase. While the market share of centralized exchanges is much higher than decentralized ones, it is still important to note that the latter is gaining more popularity.

In fact, the ratio of market share between centralized and decentralized exchanges has decreased since 2020.

The latter has been immensely popular among crypto enthusiasts who are purists. They believe in the core philosophy of blockchain i.e. true decentralization on platforms and networks through trustless, openness, and transparent operations.

Due to these reasons, decentralized exchanges are being propagated in recent times, and rightly so. After all, the end goal is to accomplish true decentralization across all blockchain niches such that there is true independence over our money/assets, no authorities governing/controlling the operations, and processes/workflows are efficient without any human intervention.

Well, while these are some of the most important reasons to have decentralized exchanges on any network, there are more reasons to have them on the Cardano blockchain.

Decentralized exchanges have been gaining immense popularity in recent times. This is due to its simple advantages of accomplishing true crypto decentralization, better security, and more efficient processes.

Here are a few reasons:

Show of Implementation

While Cardano has been praised by numerous experts for its vision and lofty goals, one common criticism the cryptocurrency network has faced is the lack of implementation. This means that while the network’s team and developers talk a lot about their goals, there’s little the audience or the public can see in action.

Thus the overall sentiment towards the Cardano network is a mixed one. Decentralized exchanges can change that by showing significant implementation on the network and also giving people a reason to utilize the network.

Cryptocurrency Ecosystem

The Cardano blockchain network aims to build a complete cryptocurrency ecosystem where all operations are possible. People must be able to gain access to various financial services, right from the basic ones to the complex ones.

This would remain incomplete without a Cardano decentralized exchange. This is because decentralized exchanges are a significant part of any network’s economy. They enable buying, selling, and trading of cryptocurrencies, which is an important financial service required by people.

Thus, one of the main entities to complete this crypto ecosystem is a decentralized exchange.

Increasing Liquidity of Cardano Cryptocurrency (ADA)

While the Cardano DEX’s would be possessing numerous crypto assets, it will also use the native cryptocurrency ADA and provide liquidity for the same. Usually, when any exchange is built on a network, the native cryptocurrency of that blockchain becomes the utility token for that exchange.

There can be multiple utilities of native tokens such as earning rewards, getting discounts on transactions, getting a higher yield rate if the exchange supports farming, referral programs, bounty programs, and so on.

All of these utilities essentially incentivize the audience to use more ADA. This means there’s higher liquidity of the cryptocurrency and more transactions for those can take place.

Boosting the Value of ADA

Creating a DEX would also increase the value of ADA. This is due to some of the reasons mentioned above. If ADA becomes the native cryptocurrency token for the DEX, it will be promoted through various incentive mechanisms.

As a result, people would opt for cryptocurrency and use it more often. The demand would thus increase and so would the value of ADA.

As the Cardano network began with ADA, which is a cryptocurrency known as the Japanese Ethereum, the DEXs are also one of the ways in which the cryptocurrency can gain more value since it will have more usage.

Example – Cardax

Cardax is on its way to becoming one of the best Cardano dex on the network. While it aims to bring to fruition all the above reasons, its main purpose is to solve the challenges posed by AMM.

One of the biggest problems with AMM is the high fees. Moreover, like Uniswap, if people do not have enough ADA or equivalent crypto-token, people cannot create their own liquidity pools as should be the case with decentralized exchanges. Cardax will solve these problems with their unique model which solves the high entry fee of AMM.

Benefits of Cardax

  • It will allow any person to become a market maker and start a liquidity pool. One could also participate in existing pools.
  • The platform will minimize slippage.
  • It will also minimize impermanent loss and offer more transparency on the prices.
  • Finally, unlike DEXs such as Uniswap, the platform will also facilitate the creation of liquidity pools without the need for a high amount of cryptocurrencies and collateral.

Additionally, the team is all set to launch the exchange and make it go live sometime early this year in Q1. While the dates are still tentative, I think it’d be interesting to note two things when the launch happens:

  • How well does it solve the problem it promises to solve?
  • How will the launch of the DEX affect the price of its native cryptocurrency, ADA?

Conclusion

Overall, these are some of reasons why Cardano’s needs decentralized exchanges. I’ve also shared a simple example of an exchange that will be launching soon on the network. It serves as a good template or framework for other upcoming DEXs since it solves a problem and is an evolved version of an existing tool/platform.

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