Success in DEX? Fast growing crypto exchanges can hurt DeFi investors

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With the rise of various coins over the past year or so, a host of Decentralized Exchanges (DEXs) have continued to emerge and accumulate massive sums of cash seemingly overnight. As a result, a number of security companies have started to question the overall security and transparency of these platforms in recent weeks.

For example, DEX ShibaSwap, which was able to capitalize on the nascent popularity of the Dogecoin-style (DOGE) with the native Shiba Inu (SHIB) token, was recently able to accumulate a Total Locked-In Value (TVL) of over $ 1 billion. in the day following its launch. This calls into question the liquidity quotient of DEXs, especially since the protocol design was poorly rated by the DeFi Safety platform reviewer.

The company initially rated ShibaSwaps’ native safety and security standards at just 3%, which is well below the platform’s minimum pass threshold of 70%. However, following an audit by Certik, a company that has previously worked with other industry players like Neo, Crypto.com, and Ontology, DeFi Safety increased ShibaSwaps’ score to 35%.

Solidity developer Joseph Schiarizzi recently issued a stern warning about staking contracts for these untested platforms, a concern that was also reiterated by DeFi Watch analyst Chris Blec.

Blec said that if, for example, the migration function of the ShibaSwaps smart contract is still under the control of a single individual, it is possible that the contract owner may choose to initiate a new migration function, allowing them to to gain control of the platform’s token pool.

Users beware

To better understand the security or lack thereof of some of these new DEXs, Cointelegraph reached out to Red, a community moderator for the decentralized yield farm aggregator Harvest Finance. In his view, since the start of the initial coin offerings and now yield farming, a whole bunch of newly started projects have apparently acquired the ability to strike tokens out of thin air and create market value, simply with promises and hype but very little substance, add:

Recently, the DeFi space has seen several DEXs spring up, promising to be the next best protocol and offering huge amounts of token rewards in exchange for liquidity, but as we’ve also seen recently, the space is on the rise. plagued by scams and stack draws that lure people in by promising them only to steal their funds and leave worthless chips.

Without speaking directly to any projects, Red said that any time a flood of money enters a protocol too quickly, it usually suggests that very little due diligence has been done by its users. Even if the intentions of the developers were good, a bug in any quickly deployed code can seriously affect anyone, ”he said.

Antoni Trenchev, the co-managing partner of digital asset lending platform Nexo, told Cointelegraph that there are two main ways to assess the security of automated money makers and DEXs:

In the event that the contract is a fork of a more established platform such as Uniswap, you should check for any changes to the contract. Second, to what extent is the original contract proven and established? Often these are easily verified by contract-savvy smart technology users, but the process varies widely for everyday users. Do DEX artificially inflate 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 funders and users. He added that thanks to the pioneering efforts of loan protocols such as Compound, this method has been able to attract large inflows of capital.

That said, a growing number of users in recent months have simply become concerned about the incentive side of things, withdrawing their assets shortly after their rewards are issued. Teams can attract cash, but in the long run the only way to keep it would be to create lasting products, services and experiences that people want, Trenchev said.

Providing his thoughts on the controversial topic of artificial TVL inflation, Ross Middleton, co-founder and CFO of DeversiFi, a layer two decentralized financial trading (DeFi) platform, told Cointelegraph that DEXs at low cost possess the ability to inflate their volumes because there is very little economic cost to trade, stating:

Since ShibaSwap is based on Ethereum, traders always pay gas fees to trade and hence the volume of trading is likely real. Trading volume can also be generated by traders trading tokens in order to get the right token ratios needed to provide liquidity to the DEX and earn cash extraction rewards.

From Middleton’s perspective, the real test for ShibaSwap will be whether or not it can maintain its current trading volumes over a longer window of time, especially as protocol mining rewards continue to dry up.

That said, he admitted that since ShibaSwap was able to forge a strong brand with its supporting community of 300,000 people, the project may in fact be upbeat, albeit temporarily. However, the lack of cash from Uniswap suggests to Middleton that ShibaSwap may not yet have been able to win the hearts and minds of the Ethereans.

Long-term testing is essential

While from a security perspective, ShibaSwap was built on Ethereum, therefore, its Liquidity Providers (LPs) are not exposed to the underlying security risks faced by side chains or centralized blockchains. . However, the fact remains that such ecosystems have not yet been tested in combat.

In Trenchev’s opinion, budding DEX smart contracts tied to coins like DOGE and SHIB really need to stand the test of time before investors start putting their money into them. It’s nice to see a Certik audit, but audits don’t capture everything and therefore LPs need to be careful, he stressed.

So, it will be interesting to see how this space continues to evolve, especially as the DeFi market is gaining more and more interest thanks to recent and upcoming upgrades to Ethereum.

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