Creating a DEX on Cardano is difficult task

The privacy-focused cryptocurrency known as Cardano would seem like a perfect use case for decentralized technology (DeFi) projects. The very nature of Cardano, which is a token compliant with ERC20 protocols, begs for at least one decentralized exchange (DEX), and ideally more than one. There are, however, a few obstacles to building a DEX on the Cardano blockchain, and this has caused project founder Charles Hoskinson to issue a vociferous warning to prospective developers.

DeFi projects such as CardStarter and SundaeSwap appear to be dead in the water. The projects have run into issues related to liquidity, and the investors backing these efforts appear to be disappointed with the way things are going. In addition to the lack of liquidity, there are concerns that the development teams may not the technology portion right.

Creating a side chain or DEX for Cardano is not an easy task because complete privacy and plausible deniability must be maintained at all times. Decentralization has a significant technical requirement: the need for transactions to be shared over a blockchain. On top of that, decentralized exchanges need to be truly decentralized — that is, they need to be able to deal with counter-party risk on a scale that centralized exchanges cannot.

In a traditional centralized exchange, the operator has access to all the funds associated with your account. On the other hand, in a decentralized exchange, the operators are just one of many nodes involved in the same protocol. As such, there is not a point in time at which the operator has access to all the funds. Hence, the trade that has been initiated cannot be reversed, as it is not being made on the blockchain at the point where the “trade” is being performed.

or the SundaeSwap and CardStarter project, it will not be enough to have nodes on a network that are required to follow the protocol. All nodes in a decentralized network must be required to, in some way or another, follow the protocol that defines the exchange. This means that a single person must be unable to unilaterally initiate a transaction or trade. In the most basic sense, the transaction is being performed by the entire network of nodes.