Key points to remember
- IDEX is introducing “hybrid liquidity” pools in hopes of combating slippage and hype in DeFi.
- IDEX Hybrid Liquidity will combine an order book and a trading engine with liquidity pools.
- As DeFi has grown, many traders have suffered from the extraction of value known as Miner Extractable Value (MEV).
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One of the leading DeFi exchanges aims to target industry pitfalls with its latest update.
IDEX targets DeFi issues
IDEX, considered by many to be one of the leading decentralized crypto exchanges (DEX), has unveiled an innovation to solve some of DeFi’s biggest problems.
The update is called IDEX Hybrid Liquidity, or IDEX HL. It merges an order book and a trading engine with liquidity pools. Popular Automated Market Makers (AMMs) like Uniswap and SushiSwap use liquidity pools and exchanges like dYdX with order books. Yet, it’s rare to find a combination of the two on a single platform.
IDEX HL was designed to protect traders by targeting key issues associated with automated market makers, including slippage issues and front-running. Slippage issues are often the cause of failed Ethereum transactions as well as insufficient gas prices. Failed transactions are a problem for merchants because they still have to pay a gas fee even if the transaction does not materialize.
According to data from Dune Analyticsaround 2-5% of transactions on Ethereum-based decentralized exchanges fail.
Ethereum’s MEV problem
Another problem that IDEX HL hopes to solve is that of miner-extractable value (MEV). Currently one of the most discussed topics in DeFi, MEV refers to the amount of value that miners can extract from a transaction by rearranging or excluding transactions. Some miners choose to exclude trades and direct the trade if there is an opportunity to profit from themselves, for example, profiting from an arbitrage trade.
The MEV has led to bidding wars over gas prices between bots, and is widely seen as a negative force on Ethereum. MEV threatens consensus because it leads miners to manipulate transactions.
In a press release Alex Wearn, CEO of IDEX, noted that MEV is a key issue in DeFi today. He said:
“Despite gaps limiting the scalability of the DeFi ecosystem, little has been done to mitigate front-end attacks, sandwich attacks, and business failures. With IDEX Hybrid Liquidity, we have finally eliminated these lingering issues in the DEX landscape.
A “sandwich attack” is a form of front-running in which an attacker spots a trader buying an asset and first buys the same asset to increase its price. Sandwich attacks result in higher slippage, which means the trader pays a higher price than expected. The attacker eventually exchanges the amount received at a higher price and makes a profit. Vitalik Buterin has discussed sandwich attacks long in the past.
IDEX HL will allow anyone to become a market maker by depositing assets, while the trading engine will provide real-time execution. This design helps eliminate front-running while reducing slippage and trade failures.
Wearn described the new liquidity pool as a decentralized exchange that offers a similar experience to centralized exchanges. He said:
“IDEX offers the best of decentralized exchanges and centralized exchanges with the non-custodial elements and the ease of market making through automated market makers. By combining a high-performance trading engine with smart contract-based custody and settlement, users get the best of both worlds.
IDEX isn’t the only exchange working on solutions to target MEV: Last month, Ethereum stalwarts Balancer and Gnosis announced they were teaming up to launch the Balancer-Gnosis protocol in hopes to protect traders. The full integration is expected to go live in mid-June.
The launch of IDEX HL follows IDEX’s decision to support trading on Binance Smart Chain in February. IDEX launched on the Binance-owned chain amid rising gas fees on Ethereum. The exchange also has its own token, IDEX. It has a market capitalization of around $74 million.
Disclosure: At the time of writing this article, the author of this feature owned ETH and several other cryptocurrencies. They were also exposed to UNI, SUSHI and BAL in a cryptocurrency index.