Success in DEX? Fast-growing crypto exchanges could hurt DeFi investors

585
SHARES
3.2k
VIEWS

You might also like


With the rise of various meme coins over the past year or so, a slew of decentralized exchanges (DEXs) have emerged that seemingly amass massive amounts of liquidity overnight. As a result, in the past few weeks a number of security firms have begun to question the overall security and transparency of these platforms.

For example, DEX ShibaSwap, benefiting from the burgeoning popularity of the Dogecoin style (DOGE) with the Shiba Inu (SHIB) native token, recently achieved a total blocked value (TVL) of more than $ 1 billion in a day after its introduction. This calls into question the liquidity quotient of the DEX, especially since the design of the protocol was rated poorly by the platform reviewer DeFi Safety.

The company at first scored ShibaSwap’s native security standards are only 3%, which is well below the platform’s minimum inventory threshold of 70%. However, following an audit by Certik, a company that previously worked with others in the industry like Neo, Crypto.com, and Ontology, DeFi Safety increased ShibaSwap’s score to 35%.

Solidity developer Joseph Schiarizzi recently issued a serious warning regarding staking contracts for such untested platforms, a concern that too repeated by DeFi Watch analyst Chris Blec.

Blec explained that if, for example, the migration function of the ShibaSwap smart contract is still under the control of a single person, the contract holder will have the option to initiate a new “migration function” that will allow them to gain complete control of the Platform token pool.

Attention users

To better understand the security – or lack thereof – of some of these new DEXs, Cointelegraph reached out to Red, a community moderator for decentralized income farming aggregator Harvest Finance. In his view, since the inception of Initial Coin Offerings – and now Yield Farming – a slew of newly launched projects have apparently acquired the ability to mint tokens from scratch and create market value, simply with promise and hype but very little substance, Add:

“Several DEXs have sprung up recently in the DeFi room promising to be the next best protocol and offering huge amounts of rewards in tokens in exchange for liquidity, but as we saw recently, the room is cheating and ‘rug “Haunted, attracts people with promises just to steal their money and leave worthless tokens behind.

Without talking directly about a project, Red explained that any time a torrent of money slips into a log too quickly, it usually indicates that its users are doing very little care. “Even if the developers’ intentions were good, a bug in any code that is quickly deployed can hit anyone,” he said.

Antoni Trenchev, co-managing partner of digital assets lending platform Nexo, told Cointelegraph that there are two key ways to measure the security of automated moneymakers and DEXs:

“If the contract is a spin-off from a more established platform like Uniswap, you need to check to see if the contract has been changed. Second, how battle-tested and how well-established is the original treaty? These are often easily verifiable by tech users who are familiar with smart contracts, but the process varies widely for everyday users. “

Are DEXs artificially inflating their TVL numbers?

People who provide liquidity to a platform are usually rewarded with nice token-based incentives. According to Trenchev, this operating model has been a powerful tool for many developers to share their success with their supporters and users. He added that this method has been able to attract large capital inflows thanks to the pioneering efforts of loan protocols like Compound.

However, over the past few months, more and more users have just looked at the incentive side and withdrew their assets shortly after their rewards were issued. “Teams can attract liquidity, but in the long run the only way to keep it is to develop sustainable products, services and experiences that people want,” said Trenchev.

Ross Middleton, co-founder and chief financial officer of DeversiFi, a second tier decentralized finance (DeFi) trading platform, gave Cointelegraph his insight into the controversial issue of artificial TVL inflation inflating their volumes as trading comes with very low economic costs , and explain:

“Since ShibaSwap is based on Ethereum, traders are still paying gas fees for the swap and therefore the swap volume is likely real. The swap volume can also be driven by traders who swap tokens to get the correct token ratios required to provide liquidity to the DEX and earn liquidity mining rewards. “

According to Middleton, the real test for ShibaSwap will be whether or not it can maintain its current trading volume over an extended window of time, especially as the protocol’s mining rewards continue to dry up.

However, he acknowledged that since ShibaSwap has been able to forge a solid brand name for itself – with a supposedly 300,000 strong support community – people are actually optimistic about the project, albeit temporarily. However, the lack of liquidity draining from Uniswap suggests to Middleton that ShibaSwap may not have been able to win the hearts and minds of the Ethereans yet.

Long term tests are a must

While ShibaSwap was built on top of Ethereum for security reasons, its liquidity providers (LPs) are not exposed to the underlying security risks that sidechains or centralized blockchains are exposed to. The fact remains, however, that such ecosystems have yet to be battle tested.

In Trenchev’s opinion, budding DEX’s smart contracts related to coins like DOGE and SHIB really need to stand the test of time before investors start pouring their money into them. “It’s nice to see Certik audits, but audits don’t cover everything, so LPs should be careful,” he said.

Hence, it will be interesting to see how this area continues to evolve, especially as the DeFi market continues to gain mainstream appeal thanks to Ethereum’s recent and upcoming upgrades.