The Hidden Cost of Zero-Fee DEX's

Restlon from Extended discusses the evolution of decentralized exchanges (DEXs) and the hidden costs associated with zero-fee models. He emphasizes Extended's goal of creating a unified margin across various trading products, including perpetual contracts, spot trading, and lending, while targeting crypto-native users and developing a retail app to broaden their user base.

The settlement logic of Extended ensures transaction validity and compliance with exchange rules, maintaining solvency by ensuring execution prices do not exceed signed prices. Users can interact with Extended through any VM wallet, allowing deposits from various chains without direct engagement with the underlying smart contract, StarCat. Critical components of a Perp DEX include self-custodial funds, on-chain solvency checks, and execution logic that prevents arbitrary liquidations.

Restlon notes that user flow and liquidity are interconnected, with a growing retail user base attracting more liquidity. He points out that while zero fees can attract users, they may lead to wider spreads over time, as seen with past promotions from platforms like Binance. The discussion reveals potential drawbacks of zero fees, such as toxic flow and wider spreads, which can deter retail users who prioritize price movements over fees.

The evolution of perpetual decentralized exchanges (perp DEXs) is highlighted, noting their growth from 1-2% of global perp trading volume two years ago to approximately 15-20% today. The safety and accessibility of perp DEXs, which do not require complex Know Your Transaction (KYT) processes, are expected to drive further growth. Properly designed perp DEXs allow users to maintain access to their funds, suggesting a promising future for multiple perp DEXs.

User interface improvements are crucial for attracting retail traders, as current perp DEXs often cater to sophisticated users. Enhancements in wallet creation during account setup and the on-ramping and off-ramping of funds are identified as key areas for improvement. Mobile trading is essential for retail users, who predominantly trade from mobile devices. The speaker suggests creating two versions of mobile applications: a pro version with full functionality and a lighter retail version.

The conversation explores trading execution and skepticism about the incentives for decentralized exchanges to pursue certain strategies unless execution costs are consistently lower than competitors. The introduction of vault systems is discussed, allowing users to deposit funds to earn yield while using those funds as collateral for trading. Concerns about safety and trust are raised, particularly regarding rehypothecation risks and the liquidation process for vault shares.

The podcast also discusses a new operation called "force close" for vaults, which allows them to close open exposure at market price against the most profitable user if the order book lacks liquidity. The importance of vault design during significant market events is emphasized, as different vaults performed variably, impacting user experience and system stability.

Plans for offering spot trading are outlined, with a roadmap to roll out vault-related features by the end of the year. Challenges related to cross-asset collateral include the complexity of liquidating collateral while settling profits and losses in different currencies. The competitive landscape of perp DEXs is discussed, suggesting the market may consist of 5-7 large players, with key areas of innovation including trading methods, liquidity attraction, collateral types, and fee structures.

The conversation concludes with considerations for launching new markets, emphasizing the importance of liquidity provision and market pricing. The transition to spot assets is viewed as a future possibility, with discussions on whether to use wrapped versions or direct issuance from companies. Overall, the podcast covers significant developments in the decentralized exchange landscape, inviting feedback from listeners.