Peer-to-peer crypto trading is a major backbone of DeFi, and decentralized exchanges are built to facilitate it.
Summary
Decentralized exchanges (DEXs) attempt to decrease or eliminate the role of middlemen in cryptocurrency trading, relying instead on automated smart contracts to conduct trades in a peer-to-peer (P2P) system. Previously a niche product, there are now a plethora of DEXs catering to various user types and built on a number of blockchain ecosystems. Platforms can have a wide variety of infrastructure implementations and system architectures. Many crypto DEXs have novel order books, liquidity pools, and other decentralized finance (DeFi) features, such as aggregation tools for new and experimental financial instruments. We’ll examine at some of the most popular DEXs and see what makes them different.
What is a decentralized exchange?
A decentralized exchange (DEX) is a cryptocurrency marketplace that links buyers and sellers via peer-to-peer (P2P) transactions. In contrast to centralized exchanges (CEXs), which retain custody of user funds held on the platform, decentralized platforms are often non-custodial, which means that when dealing on a crypto DEX platform, a user retains control of their private keys and assets. DEXs use smart contracts to self-execute under predetermined conditions and record each transaction on the blockchain in the absence of a central authority. These secure, trustless transactions are a growing section of the digital asset market, and they’re pioneering new financial products to help with market making and liquidity.
Popular DEXs typically have a larger selection of digital assets than centralized exchanges. Trading pairs can be established without centralized monitoring or authority in some instances. DEXs often feature reduced fees and more access to a wider choice of assets, but these benefits come at the expense of liquidity, security, and usability. Decentralized crypto exchanges, on the other hand, continue to improve their user experience and build scalable infrastructure. The following is a list of decentralized exchanges (DEXs) that covers some of the most popular DEXs in the crypto industry today, as well as how they cater to their respective user bases of crypto traders and investors.
The Uniswap Crypto Dex and Its UNI Token
Uniswap is a pioneer in the decentralized finance (DeFi) field and one of the largest decentralized exchanges by volume. The Uniswap platform is an Ethereum-based blockchain system that facilitates peer-to-peer trading by utilizing automated market makers (AMMs) and liquidity pools. An AMM is a smart contract that controls the Uniswap pools for which users contribute the trading tokens. When a trade is made, Uniswap’s AMM algorithm assists in determining an effective token price based on supply and demand dynamics between the tokens involved in these liquidity pools. Liquidity providers (LPs) contribute tokens to Uniswap pools, which are subsequently compensated for each transaction with a fee proportional to their part of the pool.
In September 2020, Uniswap introduced UNI, a native governance token that facilitates greater community involvement and oversight. UNI token holders can vote on Uniswap project developments that determine the platform’s evolutionary trajectory. Additionally, UNI token holders can use the token to fund liquidity mining pools, grants, partnerships, and other growth-driven initiatives that are designed to expand Uniswap’s usability and reach.
The SushiSwap Crypto Dex and Its SUSHI Token
SushiSwap is a source-code fork of Uniswap that included important community-oriented features such as staking rewards and governance via its SUSHI token. It was created by the pseudonymous Chef Nomi. SushiSwap is essentially a clone of its predecessor, Uniswap, but with a focus on giving customers more customization. SushiSwap’s emergence emphasizes DeFi’s “decentralized” element, as it demonstrates how the DeFi community may dynamically adjust and pursue an activist agenda, redirecting its activities to competitors with more attractive economic incentives and more inclusive governance.
This lesson was not lost on Uniswap, which eventually released its own governance token, UNI, and implemented similar community-centric features to regain some of the transaction volume it initially lost to SushiSwap. SushiSwap continues to see major growth alongside its counterpart, with both platforms serving as two of the most popular DEXs available to DeFi traders.
The PancakeSwap Crypto Dex and Its CAKE Token
PancakeSwap is the first and largest crypto DEX system built on Binance Smart Chain, which was launched in September 2020. (BSC). Token exchanges, staking, and yield farming are all made easier with the popular AMM-powered DEX. Users receive LP tokens in return for staking tokens in protocol liquidity pools, which they can farm to gain rewards in the form of CAKE, the platform’s native utility and governance token. A non-fungible token (NFT) marketplace, lottery system, prediction market, and Initial Farm Offering (IFO) functions have all just been added to the platform.
PancakeSwap stresses interoperability by accepting wrapped token deposits, whereas BSC uses the BEP-20 token standard designed for use on Binance Smart Chain. As a result, along with BNB and BUSD, a liquidity pool can incorporate digital assets like ether (ETH) and bitcoin (BTC). Unlike AMMs like Uniswap, PancakeSwap makes advantage of the BSC’s Centralized Decentralized Finance (CeDeFi) infrastructure, which is designed to provide users with consistent, low-cost transactions. In a nutshell, CeDeFi refers to solutions that combine centralized and decentralized architecture to improve user experience.
The Bancor Crypto Dex and Its BNT Token
Bancor launched some of the first AMMs on Ethereum in 2017, well before the term “DeFi” was used to describe the young industry. Bancor has had plenty of time to create advances in the space as an early adopter of AMMs. The current version of the protocol, Bancor v2.1, provides liquidity providers with numerous essential features, including single-sided exposure and impermanent loss (IL) protection.
A user may provide liquidity to a Bancor pool with a single token and maintain 100% exposure to the token. In contrast, many other AMMs require liquidity providers to take on exposure to multiple assets by providing liquidity to both sides of a liquidity pool. Further, Bancor v2.1 removes impermanent loss risk for liquidity providers and transfers it to the Bancor exchange protocol, which aggregates and backstops IL risk across its pools. The Bancor protocol uses fees earned from its co-investments of BNT tokens in pools to compensate for the network-wide cost of impermanent loss. While some pools may have high IL and low fees, others may have low IL and high fees. If there aren’t enough fees to fully compensate a liquidity provider’s impermanent loss at the time of their withdrawal, the protocol mints BNT, Bancor’s native utility token, to cover the delta.
The Curve Crypto DEX and Its CRV Token
Curve is a prominent AMM platform that provides a highly efficient way to trade tokens while keeping low fees and little slippage by only accepting liquidity pools made up of similarly behaving assets like stablecoins or wrapped versions of related assets like wBTC and tBTC. Curve is able to use more efficient algorithms, as well as the lowest amounts of fees, slippage, and temporary loss of any DEX on Ethereum, thanks to this strategy. In comparison to other AMM platforms, the Curve model is more conservative in that it avoids volatility and speculation in favor of stability, making it an important foundation for a deep and antifragile asset market.
In August 2020, the Curve protocol started its journey toward decentralized governance by launching a decentralized autonomous organization (DAO) to manage changes to the protocol. Most DAOs are controlled by governance tokens that give voting rights to holders of the tokens. In this case, the Curve DAO is controlled by the CRV token. The CRV token can be bought as well as earned through yield farming, which refers to the practice of depositing assets into a liquidity pool and earning tokens as a reward.
The Balancer Crypto DEX and Its BAL Token
Balancer is an AMM that allows users to establish liquidity pools with up to eight different tokens in any ratio, thereby acting as DeFi’s weighted index funds. Balancer employs its constant mean market maker equation to automatically rebalance assets inside pools through algorithm every time a trade is executed, rather than manually rebalancing liquidity pools like a standard index fund. Balancer crypto DEX trade fees are paid directly to liquidity providers, who can also get multi-purpose Balancer (BAL) tokens on a weekly basis, rather than to a fund manager like an index.
The BAL token, which can be acquired through liquidity mining by putting cryptocurrencies into Balancer’s liquidity pools, governs the Balancer system. You earn more Balancer tokens as you give more liquidity, tokens, and value to a Balancer pool.
The 1inch Crypto Dex and Its 1INCH Token
1inch is a cryptocurrency exchange aggregator that searches DEXs for the best cryptocurrency prices and helps traders avoid slippage. Slippage happens when insufficient trading activity causes an asset to be purchased for more than it was originally planned or sold for less than it was originally meant due to a lack of trading volume. The 1inch protocol pools liquidity from many DEX platforms to increase crypto DEX liquidity and reduce order slippage. 1inch released version 2 of its protocol in November 2020, allowing exchanges across 21 common DEXs. In addition to reducing slippage on individual trades, the protocol also reduces price volatility across the broader DEX ecosystem by enhancing market liquidity.
Users can earn 1INCH tokens, the platform’s native utility and governance token, as interest by supplying tokens as liquidity on the 1inch DEX. While DAOs are quite widespread in the cryptocurrency sector, and DeFi in particular, the 1inch DEX uses a “instant governance” governance approach. This proprietary architecture is intended to make protocol modification easy for token holders. The 1inch Foundation claims that immediate governance gives token holders more ownership of the platform since it allows everyone to participate in the governance process, asserting that every vote counts and that it avoids giving token holders excessive benefits.
The Growth State of Decentralized Exchanges
DEXs transacted almost $90 billion USD in trading volume in October 2021, with Uniswap and SushiSwap accounting for over 80% of that total. Despite the fact that these two primary DEX systems are the most popular, it’s crucial to remember that each DEX protocol combines AMMs in a different way, catering to different sorts of users.
The proliferation of additional protocols and supporting mechanisms will almost certainly accelerate as the crypto DEX market matures. While the Ethereum network continues to see the most DeFi activity, the development of DeFi infrastructure — including DEXs — will continue and spread to other blockchain platforms as well. All of this is evidence of the DeFi industry’s ongoing development and maturation.
