Key Takeaways
- IDEX is introducing “hybrid liquidity” pools with hopes of tackling slippage and front-running in DeFi.
- IDEX Hybrid Liquidity will combine an order book and trading engine with liquidity pools.
- As DeFi has grown, many traders have suffered from value extraction known as Miner Extractable Value (MEV).
One of DeFi’s top exchanges is aiming to target the industry’s pitfalls with its latest update.
IDEX Targets DeFi’s Issues
IDEX, regarded by many as one of crypto’s premier decentralized exchanges (DEXes), 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 trading engine with liquidity pools. Popular automated market makers (AMMs) like Uniswap and SushiSwap use liquidity pools and exchanges like dYdX feature order books. Still, it’s rare to find a combination of the two on one platform.
IDEX HL has been designed to protect traders by targeting the key problems associated with automated market makers, including slippage issues and front-running. Slippage issues are often the cause of failed Ethereum transactions alongside insufficient gas prices. Failed transactions are a problem for traders as they must still pay a gas fee even if the trade doesn’t go through.
According to data from Dune Analytics, roughly 2-5% of transactions on Ethereum-based decentralized exchanges fail.
Ethereum’s MEV Problem
Another problem IDEX HL is hoping to solve is that of Miner Extractable Value (MEV). Currently one of the most widely-discussed topics in DeFi, MEV refers to the amount of value miners can draw from a trade by reordering or excluding transactions. Some miners choose to exclude transactions and front-run the trade if there’s an opportunity to profit for themselves, for example, by taking advantage of an arbitrage trade.
MEV has led to gas price bidding wars between bots, and it’s widely considered a negative force on Ethereum. MEV threatens consensus as it leads to miners manipulating transactions.
In a press release Alex Wearn, CEO of IDEX, noted that MEV is a key problem in DeFi today. He said:
“Despite the shortcomings limiting the scalability of the DeFi ecosystem, little has been done to mitigate front-running, sandwich attacks, and trade failures. With IDEX Hybrid Liquidity, we’ve finally eliminated these issues that have persisted in the DEX landscape.”
A “sandwich attack” is a form of front-running in which an attacker spots a trader buying an asset and purchases the same asset first to increase its price. Sandwich attacks lead to higher slippage, meaning the trader pays a higher price than expected. The attacker finally trades back the amount received at a higher price and to make a profit. Vitalik Buterin has discussed sandwich attacks at length 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 trading failures.
Wearn described the new liquidity pool as a decentralized exchange that offers a similar experience to centralized exchanges. He said:
“IDEX delivers 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 mainstays Balancer and Gnosis announced that they were linking up to launch the Balancer-Gnosis-Protocol with hopes of protecting traders. The full integration is scheduled to go live in mid-June.
The IDEX HL launch follows IDEX’s move 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 cap of around $74 million.
Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies. They also had exposure to UNI, SUSHI, and BAL in a cryptocurrency index.
