DEXs stand for everything that cryptocurrencies promise - a truly transparent financial system where users are in complete control of their funds/assets. In an environment where CEXs continue to derive their principles from TradFi (traditional finance), the rise of DEXs promises democratized, decentralized, and transparent global finance.

However, CEXs continue to witness maximum user activity despite having a significant degree of centralization. While Uniswap, the largest DEX by trading volume, has just 30 million users, Binance, the world’s largest CEX, has over 170 million users.

So what’s preventing DEXs from attracting more users when they are far more decentralized in nature and promote self-custody? Well, 5 reasons are acting as roadblocks for the adoption of DEXs.

Complex Onboarding: Let’s face it, trading on DEXs (decentralized exchanges) is complex. Imagine a TradFi user having to transfer assets on-chain, do swaps, set slippage, bridge assets for cross-chain transactions, and much more. On top of it, DEX users have to safeguard their private key and recovery phase.

It all sounds like a nightmare for a TradFi user who has been using traditional trading applications for years. Centralized exchanges continue to witness increased adoption because they offer the same wine in a new bottle, i.e. access to cryptocurrency trading with a TradFi-like interface. On the other hand, poor user experience caused by complex onboarding continues to act as a roadblock. Poor roadblock prevents 88% of users from returning to a platform.

Poor Liquidity: It goes without saying that liquidity is the backbone of DeFi. How easily users can swap their crypto holdings for a different token directly impacts their trust in the platform. While sophisticated tech like AMM (automated market makers) has emerged, a significant chunk of DEXs still rely on order books.

Hence it is a loop. DEXs need more users to improve liquidity and liquidity can be only improved through an increased number of traders or partnering with multiple market makers. Unless liquidity in DeFi emulates liquidity in TradFi, mass adoption of DEXs is likely to remain a distant dream.

High gas fees: Transaction fees on a DEX is the sum of gas fees (network fees) and trading fees. Trading on DEXs is expensive with several exchanges charging high fees like GMX, Gains Network, and more, making it difficult for retail investors to make on-chain transactions.

This has a direct impact on accessibility. According to Kaiko, trading on DEXs is dominated by large players, i.e. whales. The average trade size on DEXs ranges between $10,000 and $20,000 whereas the average trade size on CEXs ranges between just $2,000 and $4,000.

For traders with limited capital of $1,000 or less, trying out the world of decentralized exchanges (DEXs) is a very costly affair.

High Latency: Uniswap, the largest DEX by volume and the number of users, has latency as high as 12 seconds or more. Dydx, the currency market leader in the DeFi space, processes up to 500 trades per second.

If you compare this to any leading CEX, the latency is much lower. While Solana-based DEXs emerge as a scalable alternative, frequent network halts are a major roadblock to increased adoption. Low latency is the need of the hour to make DEXs more scalable and facilitate faster on-chain settlements.

Different Exchanges For Perps and Options: The crypto derivatives market unlocks golden opportunities for institutions to hedge their positions. However, the absence of multiple markets, i.e. perps and options, on a single DEX makes things difficult.

There is a dire need for DEXs that allow traders to hedge their by exposing their capital to multiple derivatives markets.

The Road Ahead

Where there’s a shortcoming, there’s an opportunity to make amends. Emerging DEXs tend to have taken lessons from the challenges faced by existing DEXs in onboarding users.

Upcoming DEXs continue to leverage advanced technologies and sophisticated concepts like Layer 3 scaling to bridge the gap between TradFi and DeFi.

For example, Syndr, an upcoming world-first layer 3 DEX powered by Arbitrum, is using orbit stack to boost scalability and provides a whole new DeFi (Decentralised Finance) trading experience. On top of that, it offers latency ranging from 1 to 30 milliseconds, comparable to that of centralized exchanges, thus facilitating faster on-chain settlements than ever before. Most importantly, it is one of the very few DEXs that offers access to both options and perps markets, facilitating seamless hedging.

Syndr invests substantial efforts in designing its UX like a TradFi platform, making onboarding simpler. Lastly, it is the only upcoming DEX that provides on-chain trading with zero gas fee, which means traders will be able to save a substantial amount on their on-chain trading.

Decentralization is the only way ahead and DEXs are bound to have increased user activity over the years. However, low latency, scalability, reduced transaction fees, and increased liquidity are a few prerequisites for mainstream adoption of DEXs.

Thoughts?

For cryptocurrency investors, managing this risk is crucial to their success. While many beginners opt for the HODL (Hold On for Dear Life) strategy as a safe bet to grow their portfolio in crypto, diversification can be an even safer and more effective step to maximize profits through smart trading strategies.

Understanding Diversification

Diversification is an investment strategy that involves spreading your investments across different assets to manage risk. The idea is not to put all your eggs in one basket, but rather to spread them out so that if one investment doesn't perform well, others may do better. By investing in a variety of assets, you decrease the overall volatility and potential loss.

But just how do we diversify a crypto portfolio? The answer lies in shrewd and well-informed derivative strategies that allow exposure beyond merely holding onto assets.

How to Diversify Your Portfolio

There are several ways to diversify your portfolio within the cryptocurrency realm.

Diversification by Token Type

Cryptocurrencies vary greatly in terms of their purpose and utility. Some tokens are meant to be used as digital money (Bitcoin), others fuel smart contracts (Ethereum), while still others provide privacy-focused transactions (Monero). By holding different types of tokens, you spread your risk across different use cases within the blockchain ecosystem.

Diversification by Industry

Blockchain technology has real-world applications across various industries such as decentralized finance (DeFi), gaming (XAI games), and content creation (Theta Network). By diversifying your investments across different industries, you hedge against industry-specific risks.

Market-Cap Based Diversification

Market capitalization refers to the total value of all coins in circulation for a specific cryptocurrency. By investing in cryptocurrencies with different market caps (large-cap, mid-cap, and small-cap), you can balance potential returns with risk levels.

Exchange-Based Diversification

Lastly, diversifying across different exchanges can help manage risk associated with potential security breaches or regulatory clampdowns that can affect a particular platform. Currently, the majority of crypto traders trade on centralized exchanges (CEXs) like Binance, Kucoin, OKX, and Gate.io. However, a lack of transparency and centralization has led to more traders moving to DeFi. Unlike CEXs, where your funds are controlled by a centralized authority (just like banks), DeFi is led by decentralized exchanges (DEXs) that promote self-custody and restrict censorship.

The collapse of FTX was a trigger point for the transition to DeFi. With billions of dollars of investor funds lost and the crypto market cap falling below the $1 trillion mark, investors realized the importance of complete transparency, decentralization, and self-custody. Consequently, the interest in DEXs rose. In a nutshell, DEXs are where liquidity will be in the coming years. And, DEXs offer complete transparency, paving the way for self-custody.

Thus, the emergence of decentralized exchanges (DEXs) is bound to increase exposure by promoting self-custody. With almost every emerging crypto business, including exchanges like Syndr and dydx building their own chains, you must get accustomed to on-chain trading to navigate the decentralized economy. Also, with ever-increasing cases of cyberattacks and wallet breaches, it is imperative for traders to diversify their funds across DEXs offering increased security.

The Need of the Hour: Smart Derivative Strategies

While the HODL approach might work for some investors, others may want to consider smart derivative strategies to further diversify their crypto portfolio and potentially boost returns.

Diversification is a crucial strategy for managing risk and maximizing returns in a crypto portfolio. By exploring beyond just holding onto assets and considering smart derivative strategies, investors can potentially reap bigger rewards. However, it is imperative to understand the inherent risks associated with derivatives trading and to conduct thorough research or seek professional advice before engaging in such strategies.

Remember that diversification doesn't guarantee profits or protect against all losses—it merely spreads the risk. So whether you're a HODLer or an avid trader, diversification can provide an extra layer of security to your crypto portfolio—and potentially enhance your returns.

Challenge 1: Monopoly

The crypto options market is dominated by institutional investors currently, with limited participation of retail investors. Lack of understanding and a complex onboarding process are the two key reasons behind limited retail participation. But more on that later.

The monopoly of platforms is a bigger pain point for the gatekeepers of transparency and decentralization. Deribit dominates the crypto options market, with over 80% of the entire options trading happening through it.

What justifies this domination? An overwhelming majority of institutional investors trade options on Deribit.

Challenge 2: Security Challenges

Blockchain started off as a technology that was impossible to tamper with. However, the emergence of Layer 2 solutions aimed at solving the blockchain trilemma gave birth to bridges, which are one of the primary targets of security breaches.

The $28M Deribit Hot Wallet hack is a recent example of how fragile security in CeFi could be.

Challenge 3: Complex Onboarding (Expand on this)

Complicated interfaces continue to plague the DeFi ecosystem. Lack of interoperability means the inability of different chains to communicate. If you need to transfer assets from Arbitrum to Solana, and you have to pay a slippage, which may go up to 2%. By the time you figure out how slippage works, your capital is already reduced by 2%.

Now imagine doing that multiple times. Clearly, existing DEXs are made for DeFi natives. How do we accommodate degens? By simplifying onboarding and introducing multi-chain support.

Challenge 4: Centralization

Deribit, Delta, OKX, and Binance are the top 4 exchanges in terms of crypto options volume. What’s common between all of them? All of them are centralized. Say hi to Monopoly again. Where do DeFi and crypto options meet? Nowhere.

Options volume in DeFi is inexistent. Self-custody of funds is a far-fetched thought, and the risk of manipulation remains.

DeFi and Crypto Options? What Needs To Change

Decentralized Finance (DeFi) is all about putting users in control of their funds, but for that to happen, you must convince users about security. Other key factors are an extremely user-friendly interface, transparency, and transaction costs.

Here’s what emerging DeFi solutions need to do to onboard more retail investors:

• Simplify onboarding

• Reduce gas fees substantially

• Offer self custody

• Offer seamless risk management

Now that we know the pain points and the potential solution that could catalyze the transition of options volume to DeFi, here’s a dive into the future.

The Road Ahead

How many exchanges offer the potential solutions stated above? Zero. So, how does one expect the options volume to move to DeFi? Because there are some emerging platforms hellbent on bringing the masses to DeFi, with options trading being the pulling factor.

Syndr is one such upcoming exchange that envisions gas-free on-chain derivatives trading. Powered by Arbitrum, Syndr aims to offer ultra-low latency ranging between 1-30 ms. This means that on-chain transactions are up for lightning-fast settlements. But how is Syndr making on-chain trading simpler for degens? Here’s the gameplan:

• Extremely user-friendly UI: I tested Syndr’s UI via a special invite code a while ago, and it never felt like a DEX (decentralized exchange). It appears like a DEX with a CEX-like appearance. Thus, users transitioning to Syndr are unlikely to feel any difference UX-wise. However, it has the potential to be the simplest DEX out there in terms of UX.

• Zero Gas Fees: The high gas fee is one of the primary reasons behind the limited retail volume in DeFi. Popular decentralized exchanges like GMX and Gains Network charge you up to 0.08% trade fees for opening a trade. Syndr’s gas-free DEX is bound to catalyze retail adoption of DeFi.

• Self-Custody: Users on Syndr will be the sole custodians of their funds while enjoying a CEX-like experience and access to the highly lucrative crypto options market.

• Social Login: The exchange is hyperfocused on eliminating roadblocks, and the social log-in feature is another step to make on-chain trading more convenient.

• Portfolio Margining: Syndr will allow users to trade multiple markets with a single collateral, a first in on-chain trading. The feature will help traders reduce risks substantially.

While the existing crypto options landscape lacks a viable option for degens, Syndr emerges as a powerful alternative in the CeFi-dominated market. With zero gas fees, USD-margined everything, and features like portfolio margining, it is bound to help retail investors maximize their profits and hedge against risks by investing in options contracts.

Have a different opinion? Let’s have a discussion in the comments.

But as the mass adoption of blockchain goes through the roof, it faces a few challenges: lack of scalability, costly transactions, and lack of customization.

Layer 2 As A Partial Solution

As leading Layer 1 (L1) solutions like Ethereum and Solana witnessed increased adoption, one of the most significant challenges they faced was network congestion. What does this mean? This means L1 chains were overwhelmed with an increasing number of transactions, thanks to their ultra-low TPS.

Ethereum, the most popular L1 out there, could facilitate less than 20 transactions per second (tps). Solana did better - up to 3,000 tps. However, emerging market needs were much higher than the capacity of L1s. Thus, L2s emerged.

Layer 2 solutions are built atop Layer 1 solutions to boost scalability. As L2s increase tps significantly, it leads to the solution of another L1-centric challenge - high gas fees.

With L2s able to facilitate a significantly higher number of transactions, cost is bound to decrease. However, L1s are still in charge of security and decentralization.

L2s also allow different chains to communicate with each other, making them interoperable. For now, here are some other popular L2s: Optimism, Arbitrum, Starknet, etc.

What’s Wrong With Layer 2 Blockchains

The emergence of L2s might have made some stakeholders think that the blockchain trilemma was a thing of the past, but with centralization and security risks making a comeback, we are back to square one.

While L2s increase scalability substantially, they may require a central authority to operate. With centralization woes returning, we are already straying away from the core principle of Web3 - decentralization. Also, L2s come with an inherent security risk, and ever-increasing breaches are a testament to that. Most importantly, they are complex to operate with.

Mass onboarding to the next iteration of the internet, i.e. Web3, is highly unlikely without a Web2-like UX. No mass onboarding - > no volume - > no bull run. Do the math.

Layer 3 and Mass Adoption

The adoption of blockchain across industries has skyrocketed over the last few years. As many as 65 big and small industries have either adopted the technology or plan to do so. Clearly, existing Layer 2 infrastructure is about to get overwhelmed with an increasing number of transactions moving on-chain.

As more and more asset classes move on-chain, the need for high throughput is going to skyrocket. It is to accommodate this requirement that L3s existed as a thought.

But innovators thought of killing multiple birds with one stone. So, L3s promise to increase throughput, enable enhanced decentralization to ensure complete transparency and introduce customization. How many reliable L3 solutions exist? Zero.

But that’s going to be a thing of the past soon. Several emerging projects are also working tirelessly to introduce revolutionary L3 chains. Arbitrum-powered Syndr is right at the top when it comes to catalyzing mass adoption through L3.

How is Syndr using L3 to catalyze mass onboarding?

• Leveraging the customization potential of L3 to introduce on-chain derivatives trading with zero gas fee.

• Introducing self-custody for all.

• Leveraging L3s high throughput feature to introduce ultra-low latency.

• Introducing social logins to offer a Web2-like experience on a Web3 platform.

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While I don’t have the resources to conduct a survey that tells us how many people resist trading derivatives due to complex interfaces, it is a pain point shared by stakeholders across the DeFi ecosystem.

User Friendly Interface + Zero Gas Fee = Mass Adoption

Imagine you being able to log in to a decentralized derivatives exchange through your Facebook or Instagram account, take trades with zero gas fee, and still remain the only custodian of your funds.

Isn’t that what the blockchain movement promised from the very beginning? What prevented existing solutions from fulfilling that promise was the aforementioned challenges. Now that Syndr has solved those challenges, mass adoption is not a matter of if but when. More people entering the crypto space means more volume. More volume means increased liquidity and also, increased demand.

An increase in demand for digital assets is bound to catalyze more green days, and I do not doubt that L3s are gonna spearhead the next bull run. Do you?

Do you know of any more such L3 projects? Let’s discuss this in the comments.