EVM

Bitfinity: Scaling the Next Generation of DEXs

Discover the evolution of decentralized exchanges (DEXs) and how next-gen DEXs are revolutionizing DeFi. Learn about cross-chain interoperability, AI integration, and the role of Bitfinity in this transformative landscape.

When it comes to DeFi, all protocols are created equal. However, there are some protocols that are more equal than others, one of them being decentralized exchanges. By allowing users to trade in a completely permissionless and peer-to-peer manner, DEXs have risen as a perfect alternative to the challenges faced by traditional financial institutions and centralized crypto exchanges.

But while DEXs are praised today for their key role in DeFi, things have come a long way since their early days.

Join us in this article as we take you through the evolution of DEXs from their early days to the current design commonly termed ‘next-gen DEXs’, how they improve the design of their predecessors, and look at some popular examples, particularly those on Bitfinity.

The Evolution of Decentralized Exchanges

As we have mentioned on many occasions, a decentralized exchange is a marketplace where cryptocurrency traders transact on a peer-to-peer basis. Unlike centralized entities, a DEX does not verify users, store their funds, or control transactions. All it does, is facilitated through the use of self-executing agreements written in code called smart contracts. But how did all this come to be?

Cast your mind back to 2016 and you might remember exchanges such as OasisDEX, EtherDelta and ForkDelta. Exchanges that marked the first generation of DEXs built on a model known as an 'order book'.

An order book refers to a log of buy and sell orders within an exchange, updated in real-time.

As many would argue, the holding of the order book made these DEXs partially centralized. On top of that, they were slow in operation, had limited liquidity, and were vulnerable to hacks.

A lot of pain points explained why they quickly faded and another model of DEXs known as automated market makers (AMMs) rose to power as early as 2017.

Rather than relying on an order book to determine market prices, AMMs use pricing algorithms and organize assets in pairs, for example ETH/USDT, combined in pre-funded pools of assets a.k.a. liquidity pools. These pools are funded by other users known as liquidity providers, who then can earn interest on their deposits, that comes from transaction fees the DEX charges.

When users want to trade, they do so and swap one token for another directly from the pools. With this model, it became evident that the liquidity and higher fee problems were solved.

This opened the doors for DEXs to more than just asset swaps, to additional features such as yield farms, decentralized lending services, and launchpads.

But as the phrase goes, 'if it's not one thing, it's another.' A similar situation befell DEXs. Although the AMM model managed to solve the problems evident in earlier DEXs, it also ran into another problem - liquidity fragmentation.

This refers to a situation where assets and trading volumes are spread across multiple isolated blockchains. The main reason for this is that the majority of these DEXs either operate on a single blockchain or as an independent version on multiple blockchains with no cross-chain trading capabilities.

To solve these problems, DEXs have had to evolve to yet another version, which is what we are referring to as ‘next-gen DEXs’...

The Rise of Next-Gen DEXs

Next-gen DEXs stands for the next generation of decentralized exchanges and refers to platforms that incorporate advanced features in an effort to overcome limitations of earlier DEX designs.

To achieve this, they take the following approaches:

Cross-Chain Interoperability

As we know, cross-chain interoperability refers to the ability of different blockchain networks to communicate and interact with each other.

To achieve this, next-gen DEXs use different techniques.

The first one is atomic swaps which are more common on the Bitcoin blockchain and use a special type of smart contract called a Hash Time-Locked Contract to enable secure, peer-to-peer cross-chain transactions. These smart contracts are either completed when pre-agreed conditions are met within a set time or it is not initiated at all, hence the name 'atomic'.

The other solution is through cross-chain bridges, which wrap and lock up tokens on a source DEX to create a 1-to-1 representation on the destination DEX. But they have their flaws as well.

In addition, next-gen DEX platforms like 1inch aggregate liquidity from DEXs on different blockchains and, through these bridges, move tokens between them.

Through these 'new' techniques, next-gen DEXs enable the formation of various types of cross-chain liquidity pools that helps anyone access or move liquidity across other chains.

Integration With Artificial Intelligence

Artificial intelligence is still one of the most hot topics and keeps growing. To keep up with the trend, some next-gen DEXs have integrated AI to optimize trading strategies and better user interactions. With AI-driven tools within DEXs, users can enjoy predictive analytics, automated trading, and a personalized experience.

For instance, Genius Yield, a next-gen DEX, has developed an AI-powered smart liquidity management protocol known as Market Maker Bots (MMBs). It is a DeFi yield optimization solution that algorithmically automates trading strategies to maximize users' annual percentage yields while minimizing risk exposure often seen in AMMs.

Hybrid Architectures

As a way to balance decentralization with the performance of centralized systems, some next-gen DEXs are adopting hybrid architectures. In other words, a model that aims to have the best of both worlds. Meaning the security and privacy from DEXs and user experience and the better liquidity known from CEXs.

As we saw earlier, order books have ease-of-use, traditional trading functions, and smooth user experience, therefore taking a centralized nature, while AMMs on the other hand have the primitive crypto characteristics which define decentralization.

Therefore, in order to cross the bridge, some next-gen DEXs have integrated order book functionalities with AMM pools e.g. Vertex.

Layer 2 Integration

Also, scalability has been one of the key issues in crypto and/or of DEXs. As a way to address it, some next-gen DEXs have incorporated layer 2 solutions within their own infrastructure.

With the usual suspects such as rollups, sidechains, and Ethereum Virtual Machine (EVM)-compatible L2s that are relied upon in the hope to improve transaction speeds and reduce fees.

As a result, several layer 2 solutions have offered a refuge to these DEXs, and Bitfinity is one of them. Therefore, let us look at which next-gen DEXs can be found within this ecosystem in particular.

Next-gen DEXs on Bitfinity

Bitfinity is on itself a 'next-gen' EVM Network, and serves as a layer 2 for Bitcoin built on the Internet Computer. It offers direct and trustless interoperability between blockchains and an throughput of up to 1000 transactions per second (TPS).

In efforts to 'lock in’, several next-gen DEXs have integrated with it:

1Swap

1swap is the first next-gen DEX built on Algebra Integral and deployed on Bitfinity. The platform adopts the Concentrated Liquidity Automated Market Makers (CLAMM) model, which allows liquidity providers to focus their funds within specific price ranges, unlike the AMM model where liquidity is spread across all possible price points.

Algebra Labs

This way, it solves the liquidity fragmentation issues since LPs concentrate their assets within narrower price bands where they believe the most trading activity will occur.

In addition, by deploying on Bitfinity, 1swap is termed as the first composable DEX built on BTC because it connects several chains to unlock more DeFi activities for BTC, ICP, BRC-20 and Runes.

🤝Partnership Announcement: 1Swap x Bitfinity Network🌐

1Swap, a next-gen DEX is launching on Bitfinity EVM! Here’s what it brings 🫳
🔸 Native Bitcoin DeFi
🔸 Scalable, low-cost trading
🔸 Cross-chain liquidity

📣In collaboration with @CryptoAlgebra @1buyio and built for… pic.twitter.com/MQc9zJFj9h
— Bitfinity Network (@bitfinitynet) January 31, 2025

Dexfinity

Home | Dexfinity

Trade, earn, and own crypto on the all-in-one Dexfinity

Dexfinity

Dexfinity presents itself as another 'next gen' DEX built on the Bitfinity to facilitate the exchange of ERC-20 tokens. The exchange is based on the AMM model and by implementing on our net, it has managed to address some of the problems in traditional AMM DEXs like high fees and complicated user interfaces.

Besides exchange of tokens, it also has support for other services like farming, where you can stake its native token $DEF and earn revenue generated from the exchange.

On top of that, you can become a liquidity provider in various pools and get incentivized with fees collected from trades in these pools. As part of its roadmap, Dexfinity aims to integrate with AI in March 2025.

Portal

Another one is Portal, which is a cross-chain DEX that leverages Bitcoin's security and unlike traditional DEXs, Portal uses L2s of various chains to execute atomic swaps.

At its core, Portal is based on the Automated Dynamic Market Maker (ADMM) liquidity model, which is an improvement on AMM. Unlike the initial AMM model where liquidity is spread across all possible price points, ADMM supports market orders, range orders, and limit orders, allowing LPs to have price precision.

Portal has created Omnichain Liquidity where individual AMMs on Bitcoin, Ethereum and other chains coordinate to form a Multi Chain Layer-2 AMM (MC-LAMM).

Given the aligned goal of both Portal and Bitfinity, the two formed a partnership in an effort to unlock Bitcoin’s full potential and the first milestone was the listing of Bitfinity’s ERC20 token on Portal DEX.

But beyond that, there is potential for incorporating Portal’s Swaps SDK into Bitfinity wallets, merging Portal’s AI Agent with Bitfinity’s ICP Chain Fusion, and more.

ICPEx

ICPEx is a DEX built on the Internet Computer that uses the Proactive Market Maker (PMM) algorithm for enhanced price discovery and liquidity management.

Unlike traditional models, PMM dynamically adjusts fund allocation and slippage, which improves capital efficiency for both high and low liquidity assets.

ICPEx is partnering with the Bitfinity to help it achieve its cross-chain functionality expected by the end of 2025 under its V2. Still under this version, ICPEx aims to introduce AI agents as a way to improve its trading intelligence.

🎉We are very happy to announce our strategic partnership with Bitfinity @bitfinitynet!#Bitfinity is a blazingly-fast, next-gen EVM, serving as a Layer 2 for Bitcoin and other assets. We will explore the multi-chain integration of blockchains such as #BTC, #ETH, and #ICP… pic.twitter.com/cXghcB4YNE
— ICPEx ∞ (@ICPExchange) June 21, 2024

Conclusion

The DEX space is getting older and the next generation might take it over from older ones. What is needed are users that bring in liquidity. So in order to do so, these new generations need to solve the pain points known by anyone who wants to use the 'unfriendly user experience' in times of high volatility or network congestion.

The ones who find solutions for these bottlenecks will do well in the long run. Whether this happens on Bitcoin or EVM, either way with the help of Bitfinity, remains to be seen.

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Bitfinity: Scaling the Next Generation of DEXs

The Evolution of Decentralized Exchanges