Introduction to Polkadex Decentralized Exchange: The trading engine for Web3 and DeFi

7 min readMar 12, 2021

Decentralized finance (DeFI) is becoming a new trend in the crypto community in Vietnam as well as around the world. Defi with superior features can help expand the use of blockchain from simple value transfer to more complex financial use cases. When it comes to projects that are built to disrupt the DeFi universe, Polkadex is a network that is much further ahead of its competitors. It is the next-generation decentralized exchange (DEX) for the DeFi ecosystem.

What is Polkadex?

Polkadex is a fully decentralized, peer to peer cryptocurrency exchange for the DeFi ecosystem that runs on the Substrate framework. Polkadex aims to bring to users the same trading functionality and performance of a centralized exchange (CEX), but with the added benefits of better user-experience and fully decentralized security.

Polkadex is unlocking the existing and future financial markets for everyone, bridging traditional money markets to a decentralized store of value and trust, thereby preparing the world for a tokenized future. Polkadex innovates in four core areas of decentralized security:

Customer Experience
Execution Speed of Trades
Custody of assets
Liquidity

The question is: How can Polkadex achieve that while other DEXs running on Ethereum have failed in the past? Let’s find out the answer in the following parts of this article.

Key features of Polkadex

Polkadex overcomes the weaknesses of previous DEXs by providing:

1. Substrate Blockchain Framework

As you may know, Substrate Blockchain Framework allows anyone to create an application-specific blockchain without worrying about the technicality of block production and consensus.

This allows Polkadex to create a dedicated blockchain for decentralized exchange, which is purpose-built and configured to optimize the performance of DEXs.

2. Perpetual Liquidity Mining Algorithm

Previously Ethereum Smart Contracts allowed the creation of Defi services, but it is limited in computational resources required for the proper functioning of DEXs:

It does not scale well
It is not upgradable
It never provided a good trading experience to users

Such limitations in computational resources led to the rise of Automated Market Making (AMM) protocols like Uniswap. With many DeFi platforms copying AMM models that were successfully applied to Uniswap, arbitrage in such environments appears to be a land of opportunity, making investors queuing up to invest in projects focused on liquidity mining and swap protocols.

Despite seeming attractive, these price differentials end up being a problem for arbitrageurs in the protocols because of inherent liquidity problems. Polkadex is designed to unite the best characteristics of the “centralized” exchanges of large volumes, such as order books, and the model of the AMMs popularized by the DEX, but under a single parachain connected to the Polkadot network.

3. Off-chain State Commits — Layer 2 scaling solution

As mentioned above, Polkadex uses peer-peer signatures in conjunction with state commits to the blockchain that will essentially create snapshots of the state transition. This is part of the layer 2 scaling mechanism designed and developed by the Polkadex team.

In Polkadex, different models and tools have been classified into two criteria:

Orderbook, Trader Assets Management, Bridge mechanism to Polkadot and Ethereum, and On-chain market making bots are On-Chain.
Trading features like market data aggregation, technical analysis indicators, storage and retrieval of trade history, and all the remaining exchange-related features are made Off-chain.

This enables us to increase the throughput of trades and makes it comparable to the efficiency of CEXs, but with truly decentralized and trustless infrastructure.

4. Polkadex feeless transaction mode

Polkadex supports two types of trades in the beginning: Simple Limit and Market orders. However, it will be launching subsequent complex algorithmic trading as part of its product roadmap to be rolled out in the next few months.

Market-taking orders have a trading fee of 0.2%, and market-making orders have zero trading fees. Out of the trading fees, 25% will go into liquidity mining, 25% will go to governance and 50% will go to the Foundation. When applying zero network fees, trading bots can freely interact with the orderbook without incurring network fees, unlike Ethereum based DEXes.

In the DEX world, front-running happens a little differently. Professional traders with superior computing power and fast trading bots can easily apply front-running to make profitable trades.

By not collecting transaction fees, Polkadex tackles this problem. This innovation not only takes away the power to control the order of execution, but it also eliminates economic incentive to do so. It allows faster trade execution times and also gives equal opportunity for anyone placing a transaction on the orderbook.

5. Solving the liquidity problem

Polkadex addresses the liquidity problem using two breakthrough ideas: 1) Perpetual Liquidity Mining in the AMM Pool 2) Layer 2 scaling solution for the orderbook.

As the name suggests, liquidity mining enables constant interest-earning accounts for users who provide liquidity based on the amount of time they lock in the funds.

Layer 2 scaling solution allows regular market makers to bring in liquidity to the DEX without incurring any fees whatsoever and also a fast trading interface ensures that liquidity flows seamlessly. Market makers can finally participate in a DEX for engaging in profit-making HFT activities.

For exchange assets, there are two ways that Polkadex can bring liquidity: Polkadot Parachain and Snowfork trustless Ethereum Bridge, which connects Polkadex to the Ethereum network.

Roadmap

Milestones and partners

Polkadex released Testnet version 2.0

Although the mainnet has not officially launched yet, users can experience testnet version 2 after the release of version 1 in 2020. Furthermore, testnet version 3 will be available soon.

This version enabled the public to the following features:

Use testnet tokens to submit trades.
Watch the live trades being executed by the Polkadex engine using the explorer link here.

Polkadex collaborates with KILT Protocol and Fractal

Earlier this year, Fractal, KILT Protocol, and Polkadex announced our partnership to create a decentralized know your customer (KYC) system for exchange customers. Polkadex and Fractal will use the KILT Protocol as the underlying infrastructure for managing the KYC credentials required by Polkadex, to simplify and streamline the onboarding experience. This allows Polkadex customers peace of mind since our partnerships mean Polkadex will never store KYC identifiable user data in any of our servers, but they will have the ability to execute trades that require KYC verification. This will be applicable to the orderbook exchange and will not be necessary for the AMM swap pool.

Polkadex raised $3 million in seed and private investment rounds

Polkadex has raised $3 million in seed and private investment rounds from LD Capital, Kenetic Capital, NGC Ventures, QCP Capital, AU21 Capital, CMS Holdings, Block Dream Fund, PNYX Ventures, Genesis Block Ventures, JRR Group, Cluster VC, GBIC, Momentum 6, Master Ventures, DAG, YBB Foundation, Blocksync Ventures, BTX Capital, Waterdrip Capital, Genblock Capital, Existential Capital, and Outlier Ventures. The proceeds will be used to fuel Polkadex’s growth and become the first orderbook based DEX in the Polkadot blockchain ecosystem.

Polkadex Board of Advisors

We are honored to have some top-class advisors support us.

Mr. Matthias Hafner from Cryptecon.org is on the Polkadex board of advisors. His knowledge in building Economic models and simulations in decentralized networks adds great value to our intellectual capital.

Polkadex Founding Team

The future of Polkadex in the DeFi space

DeFi is a new and attractive option for large and established financial institutions, not just crypto enthusiasts. DeFi projects have recently been well received and are handling multi-billion dollar daily transaction volumes. As DeF develops from a nascent industry into a stable platform serving the wider financial community, DEX’s like Polkadex will ride that wave of strong succession and become the preeminent development platforms where traders conduct their business.

Polkadex has competitive advantages that place us well ahead of other DEXs by implementing various first-in-the-market innovations that differentiate us. Polkadex improves user experience in the orderbook by using its layer 2 solution — Off-chain State Commits. Besides, the Polkadex exchange extends multi-chain both on Ethereum and Polkadot based on Parachain and Bridge Chain, thus solving the problem of custody of funds in the exchange.

The last, and most important factor, is the customer. Polkadex was founded to be the number one DEX that all traders will use on Polkadot. We are honored to work with a number of industry-leading investors, advisors, and strategic partners who also share our vision for DeFi and recognize the groundbreaking work we have already achieved. We have all full confidence that Polkadex will become more popular in the coming days due to our differentiated benefits that allow our customers all the benefits of a CEX, but with the added benefits of better user-experience and fully decentralized security.