Part 3: DEX's and Sidechains
DEX: What does a decentralized exchange do? What is DeFi?
Uniswap is the largest decentralized exchange (or DEX) operating on the Ethereum blockchain. It allows users anywhere in the world to trade crypto without an intermediary. UNI, the governance token that allows users to vote on key protocol changes, is the fourth largest cryptocurrency by market cap on Coinbase as of April 2021 — with a total value of more than $18 billion.
Uniswap was one of the first decentralized finance (or DeFi) applications to gain significant traction on Ethereum — launching in November 2018. Since then, numerous other decentralized exchanges have launched (including Curve, SushiSwap, and Balancer), but Uniswap is currently the most popular by a significant margin. As of April 2021, Uniswap had processed over $10 billion in weekly trading volume.
Why are there so many DEXs with “Swap” in the name?
It’s because Uniswap, like most crypto protocols, is open source, meaning anyone can both see exactly how it works and adapt the code to create a competitor.
In recent years, a large number of DEXs adapted from Uniswap’s code have launched, including food-named competitors like SushiSwap and PancakeSwap. (If you want to read more, check out this issue of Coinbase’s Around the Block newsletter.)
Sidechains
Blockchain doesn't need any introduction now, and most of us know how much potential this technology holds. The sudden invasion of this technology in the industry has garnered the attention of many industry leaders. From Mark Zuckerberg to Jack Maa every great mind has mentioned that the blockchain could revolutionize the world with its great benefits. However, like everything the decentralized system has some limitations and flaws. The major issue with the blockchain is scalability, for instance, Ethereum can process only 15 transactions per second. The limited capability of carrying out the processes restrains the blockchain from going mainstream. But, there is another emerging technology that could boost up the blockchain, and that are Sidechains. In the coming years, the technology could widespread across the industry to enhance the existing blockchain network. Maybe you have already gone by this term, or you are hearing it for the first time, but don't worry by the end of this article you will know everything about sidechains.
Blockchain network is the most secure and reliable one that we have right now and it could possibly change the world in the coming days. But, the existing Blockchain system has some flaws that could be optimized for improved performance. The blockchain technology requires a new architecture design that could deal with the scalability. Sidechains are the enhanced mechanism that enables the process to transfer different digital assets separately from one blockchain to another, and that can also be transferred back to the original blockchain when required.
If the above-mentioned definition of sidechain is a bit technical then here is the layman description that could help you in understanding it.
First, you need to know that the existing blockchain or parent blockchain is referred to as the ‘main chain.’ Now consider a highway busy with ongoing cars on it and there are a series of adjacent roads also. The highway is the main chain on which the transactions or processes are going in the form of a car, and adjacent roads are sidechains (where cars could go faster). Besides, the roads could be joined to the highway anytime. So, the transactions (or cars) going on adjacent roads with high speed could scale the entire blockchain system for increased number transaction per unit of time.
Now, the important point is that there could be multiple sidechains in the system not only for transactions but different functions also. One could be for computations, and another sidechain could be for speeding, depending upon the factors of improved processing. With this way, the overall load and work on blockchain network could be distributed among sidechains.
How Exactly Do Sidechains Work? Click Here for all the details!
What about the security?
The core reason for moving towards the blockchain is the decentralized system that ensures the maximum security to the users. So, what about the sidechain, are these as secure as the original blockchain network? Yes, these chains are as reliable as the main chain. Besides the cherry on the top is that for security, the sidechain is on their own, they don't rely on the parent chain. This means any disturbance or problem in the main chain won't affect the sidechain, beside the sidechain will keep it issues within its network and won't let pass any of them to the main chain. Along with this, the sidechain requires different mining so that you will see the separate miners here. The miners here earn the incentives via merge mining. The merge mining is the process where two different cryptocurrencies with the same algorithm are mined together at the same time.
Advantages of Sidechains
The Sidechain or childchains adds the scalability to the blockchain network that boosts up the overall efficiency of the network. Sidechains are permanent that means you don't have to create them again and again. Once the sidechain is created, it can be used by anyone seeking for any task outside the main chain or blockchain.
The other advantage of sidechain is that it enables the interaction between two different cryptocurrencies in the system. This allows the developers to test their beta coins and software upgrades prior to the official launch.
The Takeaway
The addition of the sidechain not only brings the scalability but also a number of transactions at a lower transaction cost. So, it is clear that the Sidechain concept is here to improve the existing blockchain technology further. There is no doubt that in the coming time this addition will take the technology to a larger scale of applications in the industry.
Keep Your Eye On This Chain: POLYGON
Polygon
Polygon is a “Layer two” or “sidechain” scaling solution that runs alongside the Ethereum blockchain — allowing for speedy transactions and low fees. MATIC is the network’s native cryptocurrency, which is used for fees, staking, and more. You can buy or sell MATIC via exchanges like Coinbase. To use it, you can “bridge” some of your crypto over to Polygon, and then interact with a wide range of popular crypto apps that were once exclusive to the main Ethereum blockchain.
What is MATIC?
Polygon has its own cryptocurrency, called MATIC, which is used to pay fees on the Polygon network, for staking, and for governance (which means that MATIC holders get to vote on changes
How do you use the Polygon network?
The Polygon network allows you to do many of the same things the main Ethereum network allows, but with fees that are often a fraction of a cent. You can try decentralized exchanges like QuikSwap or SushiSwap, yield-generating lending and savings protocols like Aave, NFT markets like OpenSea, or even “no-loss prize games” like Pooltogether.
To try the Polygon network, you need to send some crypto to a compatible crypto wallet like Coinbase Wallet. You can then “bridge” some of your crypto — stablecoins are a popular choice for this — to the Polygon network. You’ll also need to bridge some MATIC to make transactions, but even a dollar’s worth is plenty because fees are so low.
Low fees and near-instant transactions make the Polygon network an excellent way to gain some real-world experience trying out DeFi protocols. (Remember that DeFi can be highly volatile — so start small and don’t invest more than you can afford to lose, especially as a beginner.)
Reference: https://www.coinbase.com/learn/crypto-basics
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