All you need to know about Decentralized Exchanges
What is a Decentralized Exchange (DEX)?
Decentralized Exchanges are an important part of the DeFi universe, and they mostly operate without an intermediary institution managing their pairs or controlling user funds. This means users are able to exchange different cryptocurrencies and tokens without any intermediary, any time they want to, from anywhere in the world and with pre-agreed parameters as long as there is enough liquidity in the AMM (Automated Market Maker) Protocol.
According to Messari, the volume traded in DEXes grew 83% in the second quarter of 2021 compared to the previous quarter.
A straightforward advantage of DEXes we can point out is the immediate reduction of risk regarding price manipulation, inside trading, market maker dependency, server downtime, central points of failure as well as being able to trade crypto assets with no KYC required, taking anonymity to the next level when compared with centralized exchanges.
DEXes are also a great way for users to access tokens as soon as possible. Since centralized exchanges require a relatively lengthy process to list new tokens, upcoming coins are usually available on DEXes way earlier than on CEXes, usually through a process called IDO (Initial DEX Offering).
On the other hand, DEXes offer some trade offs like limited functionalities (no limit/spot orders and futures out of the gate), relatively low liquidity, no recovery once transactions are settled, and ease of malevolent actions such as honeypotting and rug pulls. This presents a barrier of entry for newcomers, requiring a bit more adaptation and responsibility for users coming from centralized exchanges.
Decentralized Exchange (DEX) and Centralized Exchange (CEX)
It is possible to buy and sell cryptocurrencies and tokens on both. However, a DEX is autonomous and run by algorithms and smart contracts, while a CEX is run by a central company. Some examples of known DEXes are Uniswap and Sushi, while well-known CEXes include Binance and Coinbase.
AMM and DEX
An Automated Market Maker (AMM) is a type of mechanism empowering Decentralized Exchanges (DEXes) used to provide liquidity in decentralized finance (DeFi) that relies on a mathematical formula to price assets. The assets are priced according to a pricing algorithm.
It works differently from an orderbook exchange, which means you don’t need to have another trader on the other side to make a trade. Instead, you interact with a smart contract that provides the market for you in an autonomous fashion.
Another feature offered by AMMs includes liquidity mining (or yield farming) where users can earn protocol governance tokens for supplying liquidity.
There are DEXes operating with AMM (such as Uniswap) and with orderbooks (Serum, for example).
DEX and Liquidity Pools
Unlike Centralized Exchanges, DEXes allows the user to provide liquidity and earn fee money from it (which does not happen easily on CEXs). This characteristic is connected to the concept of liquidity pools.
Liquidity pools are pools of crypto funds, locked in smart contracts that provide liquidity in decentralized exchanges (DEXes). It facilitates for the user to engage in decentralized, permissionless trading, lending, borrowing activities, and in turn getting rewards in the form of the crypto.
We name Liquidity Providers (LPs) the person or institution that provides their crypto assets and adds funds to liquidity pools. In return for providing liquidity to the protocol, LPs earn fees from the trades that happen in the pool.
A brand-new project: The First DEX and AMM on Syscoin NEVM — Introducing Pegasys
Pegasys is a permissionless decentralized exchange (DEX) running on Syscoin NEVM, Syscoin’s EVM-compatible protocol extension. From the concept until the development of Pegasys, the purpose is to create something useful, fresh, and impactful to the DeFi space.
Pegasys offers three critically important benefits:
- Fast and cheap trades.
- High-quality development with bold roadmap.
- A realistic, fair, and market-compatible token distribution.
Also, Pegasys has great key features, such as:
- First and leading AMM on Syscoin.
- Permit-based architecture so you cut down transactions.
- Upcoming Launchpad, Multisig and other features.
- Galaxy-themed ecosystem builder for DeFi.
- Open-source libraries for other DeFi protocols to build up on.
- Key partnernhips paving the way for DeFi inside Syscoin.
The official release for the Pegasys DEX is scheduled for April 2022 and early users from both the DEX and Syscoin NEVM as a whole are eligible for $PSYS airdrops, so make sure to join in early! Even if you miss out on this first opportunity, the PSYS farms are going to be very welcoming so users can put their liquidity to good use and help us build a fair and solid PegasysDAO.
Pegasys is also future-proof: by leveraging the upcoming SYscoin zkEVM Layer 2 solution, the protocol is going to reach new scalability heights, near-instant transactions and unmatched UX without compromising security.
Pollum is behind the development of Pegasys, make sure to tag along: