Guide on the Different Types of Decentralized Exchanges (DEXs)
Decentralized exchanges have become more popular because they enable instantaneous trades that are often at a lower cost and eliminate intermediaries. DEXs take on a non-custodial framework which means you can retain custody of your cryptocurrency and are responsible for managing your wallets and private keys. These trustless, secure transactions represent an accelerating segment of the digital asset market, thereby pioneering new financial assets.
Since their early days, decentralized exchanges have come a long way, and many are arguably on par with centralized exchange platforms. The DEX landscape is wide, but in this article, we have explored three major types of DEXs that you’ll need to know.
Automated Market Makers (AMM)
Automated Market Makers are very much the backbone of the DeFi space and are an alternative method to the traditional order book method of facilitating exchanges. Without intermediaries, AMMs can quickly determine the price of an asset according to how the ratio of the assets in a liquidity pool changes. Assume that there is a liquidity pool with ETH and BNB. When a large amount of BNB is purchased, its price will increase as the proportion of BNB in the pool has decreased, compared to that before the purchase was completed. Meanwhile, the price of ETH will decrease as its proportion, or relative supply, in the liquidity pool has increased. AMM thus keeps the DeFi up and running 24/7 and creates an efficient and permissionless platform for exchanges. What’s more? Liquidity providers providing liquidity to AMMs such as Uniswap, PancakeSwap, and Balancer are also often entitled to earn a portion of the trading fees in their respective liquidity pools.
The DEX aggregators serve as unified platforms for the price and liquidity provided by various decentralized exchanges (DEXs). They use multiple protocols and mechanisms to address liquidity issues. With the growing increase in the use of decentralized exchanges, DEX aggregators have become an on-demand service. They collect data from decentralized exchanges and facilitate split trading to provide the best price. By pooling liquidity across multiple DEXs, they minimize slippage on large orders, optimize swap fees and token prices, and provide traders with the best price in the shortest time. Some popular DEX Aggregators include 1inch and ParaSwap.
There are also DEXs that focus on the derivatives market. Instead of purchasing and owning an asset, you trade the price of an underlying asset. The underlying asset can be any cryptocurrency coin or token and options to track assets from the traditional financial markets are also available. Often, high levels of leverage are also available to traders on derivatives exchanges. Looking forward, there is a massive market for cryptocurrency derivatives that continues to grow, as seen by Binance’s $50 billion in daily derivatives trading volume. Some examples for such exchanges include Synthetix, dYdX, and of course, Linear Finance.
Hope this short guide on the various types of DEXs in the DeFi space has been useful! Stay tuned for more tutorials and guides or connect with us on our various social media channels!
About Linear Finance
Linear Finance is a cross-chain compatible, decentralized delta-one asset protocol that allows users to get synthetic exposure to various assets, including cryptocurrency, commodities, and market indices. Users can utilize our cross-chain swap functionality to instantly swap assets across leading blockchain environments and DeFi protocols with unlimited liquidity and zero slippage.