How do Decentralized Exchanges Make Money?
Blockchain technology is a game-changing breakthrough that has changed our lives completely. It has been used in several areas because of its trustless nature, absence of centralized administration, security and privacy, and ability to give users complete control over their data. With the introduction of this technology, new investment vehicles such as Decentralised Finance (DeFi) have emerged.
Users can lend or borrow money, bet on asset price variations (derivatives), trade cryptocurrencies, insure against risks, and earn interest in savings accounts using DeFi networks. Many people now see them as viable investment choices because of their numerous features and capacity to recreate well-known traditional financial systems and products on the blockchain. One of the popular tools users utilizes to access DeFi services is Decentralized Exchanges.
What are Decentralized Exchanges?
Decentralized exchanges are cryptocurrency exchanges that use a peer-to-peer network to allow traders to trade securely over the internet. DEX conceals users’ identities and eliminates all sorts of centralized control.
Automated market makers (AMM), Order books DEXs, and DEX aggregators are the three basic forms of decentralized exchanges. All of them employ smart contracts to allow users to trade directly with one another. The initial decentralized exchanges employed order books that were comparable to those used by centralized exchanges.
Some of the most popular decentralized exchanges are Uniswap, Pancakeswap, Sushiswap and others. Quite a number of these projects boast of having a total value locked that spans up to billions in dollars showing how profitable they can be.
How are Revenues Generated on a DEX?
There are two major ways through which a decentralized exchange can generate the revenue they get, and they are;
- Transaction Fees: The most fundamental requirement of DeFi users is the exchange of tokens. Charging a modest fee for this transaction is one of the most straightforward methods for a DeFi protocol to create revenue flow. The fees charged on each decentralized exchange are proportionate to the amount exchanged. Depending on the procedure and pool in question, these fees typically range from 0.30% to 0.01%.
When these revenues are created, they flow differently on each protocol and can be dispersed in a variety of ways among all parties connected with the protocol: liquidity providers, the DAO/team supporting the protocol, and/or token holders.
- Governance Tokens: In decentralized exchanges, governance tokens account for the majority of value creation. They are naturally valuable since they are the closest thing decentralized exchanges have to ownership and typically carry some sort of control over the future course of the DEX.
Apart from the power to influence the DEX’s decision-making process, a platform’s governance tokens generally come with a slew of other benefits. If the team gets it right on introducing such tokens, the governance token price rises over time, incentivizing adoption by yield farmers, investors, and traders.
When a governance token offers so much utility and benefits, more people would want to buy, hold and stake the tokens. This eventually drives up the demand for the token and, consequently, the price.
Over the last 24 months, the popularity of DeFi and DEXs has skyrocketed. All statistics have climbed dramatically, including value locked, users, transactions, valuations, and so on. Every system needs revenue sources to exist, and decentralized exchanges have discovered a way to provide a few of them.