Background

DeFi's appeal attracts attention, yet crypto natives lean towards centralized exchanges due to the Blockchain Trilemma, identified by Vitalik Buterin, which revolves around security, scalability, and decentralization. Centralized exchanges offer order books with efficient price discovery and control. However, sustaining a Central Limit Order Book (CLOB) demands a continuous influx of liquidity, presenting challenges for long-term sustainability. Replicating this complexity on-chain faces challenges due to the storage and computational limitations of blockchains.

Enter the Constant Product Automated Market Maker (CPAMMs), a savvy DeFi alternative to on-chain CLOBs. Despite its advantages, CPAMMs have less efficient pricing dynamics. Post-trade price changes expose Liquidity Providers (LPs) to impermanent loss and high slippage, highlighting the primary challenge for DeFi Liquidity Providers—capital inefficiency.

Another challenge for DeFi users involves managing assets through self-custody. Users typically rely on Externally Owned Accounts (EOA) wallets for DeFi asset swaps, but EOAs have limited functionality and security risks. Even more secure hardware wallets face similar limitations and require careful seed-phrase management.

The third and final challenge is the complexity introduced by blockchain platforms, impacting user experience. Cross-chain bridges for asset movement between blockchain networks can be confusing and risky, gas fees are unpredictable and costly, and certain actions may require multiple signatures, adding extra steps.

These challenges converge in the DEX Trilemma, a trade-off between self-custody, user experience, and capital efficiency. Dextr aims to address these challenges by exploring hybrid models that combine Automated Market Makers (AMMs) with CLOB features, seeking to mitigate the limitations of both systems.

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