Decentralized cryptocurrency exchanges: how to pick the right one
DEX: Decentralized exchanges. Some feel right at home there, others struggle endlessly. We’ll cover the basic features, advantages, disadvantages, and top 5 exchanges.
Decentralized exchanges (DEX) are quickly becoming the driving force of the cryptocurrency market. They enable nearly uncontrolled and unrestricted distribution of tokens through an intuitive and simple interface. To do so, they utilize a, seemingly scary-sounding, system of smart contracts. In this article, we’ll break down decentralized exchanges and show you how to choose the best one for you.
What is a decentralized crypto exchange?
Decentralized exchanges are web-based applications that allow cryptocurrency trading without the need for an intermediary. Thus, no transaction is controlled and cannot be reversed, as opposed to traditional exchanges like Binance, Bitfinex or KuCoin.
There are several types of such exchanges, but most have one thing in common: the integration of smart contracts. This is the code that, using blockchain, oversees the brokering of trades and their execution. A self-fulfilling and self-enforcing contract between the trader and the users of the platform.
Each network that supports smart contracts has its own decentralised exchange. The Ethereum network has the largest one — Uniswap. Binance Smart Chain has another platform — PancakeSwap. A token can only be traded on an exchange that operates on the same blockchain.
The trade takes place between a securely connected wallet and a liquidity pool. Liquidity pool is created by users of the platform “pooling” their resources together and providing liquidity for the exchange. For this, they are rewarded by interest on the cryptocurrencies they locked in the pool. This is different from standard exchanges, where liquidity is ensured by a central authority.
How is the price determined on a decentralised exchange?
Each exchange may have it a little different. However, most of them, such as Uniswap and PancakeSwap, use a simple mathematical formula. The protocol compares the ratio of tokens in liquidity pools to determine the price.
Advantages of a decentralised exchange
Using a decentralised exchange has several advantages.
Huge selection. Almost every cryptocurrency on the network can be found on the appropriate decentralized exchange. And the ones that aren’t there can be added by anyone.
Security and anonymity are a top priority for many crypto-enthusiasts. Since the only information you’re providing to the exchange is your wallet’s address, not your email or ID, it is the most anonymous form of exchange. On the other hand, every trade will be written into the blockchain.
Since various projects are interested in having their cryptocurrency traded on a decentralized exchange, liquidity providers can earn a pretty penny.
Disadvantages of decentralised exchanges
Anyone can “list” a token on a decentralized exchange, which means fraudulent tokens representing brands such as Tesla or Microsoft may appear there. Or a fake token for a project that is not yet on the exchange.
Fees are subject to the network on which the smart contract runs. If it’s Ethereum, it can normally cost up to $300 per swap. The Ethereum Foundation is working hard on the problem.
Which decentralised exchange to choose?
Which DEX is right for you? The token you plan to purchase must always run on the same network as the decentralized exchange. If you are unsure, look up the token information on the project’s website. Don’t risk falling for imitators.
Another good source is the project’s official channels such as Twitter or Telegram. There you can get information about the correct network.
If you are just interested in the best decentralized exchanges, we have our TOP 5 ready below.
By far the largest decentralized crypto exchange is Uniswap. According to data from August 2021, it is the fourth largest exchange. It uses the Ethereum blockchain, which many of the top cryptocurrencies run on.
The unique thing about Uniswap is its approach to decentralized exchange. Instead of linking the buyer’s wallet directly to the seller’s, it creates the aforementioned liquidity pools. This makes the trade secure and pseudo-anonymous.
Benefits of Uniswap
- It’s easily accessible. The internet is full of tutorials and advice.
- It has the highest liquidity of all decentralised exchanges.
- It is reliable and safe.
Disadvantages of Uniswap
- The Ethereum chain often suffers from high fees.
1Inch is a modern liquidity aggregator that connects several decentralized crypto exchanges at once and offers them under one roof, within one application. The app gained popularity in the second half of 2020.
Aggregating liquidity from multiple exchanges has proven particularly effective in reducing slippage (sometimes referred to as “slippage during execution”). This term refers to the difference between selling and buying price. That is, when you buy you pay more than the currency’s worth and when you sell you get less than what you paid for.
It is the reduction of this market error that is behind the popularity of 1Inch. Both Binance Smart Chain and Ethereum tokens can be found on it.
Benefits of 1Inch
- Friendly user environment. Includes candlestick charts.
- Good buying and selling price. Minimal slippage.
- Chi token. A unique token that allows you to save on fees.
Disadvantages of 1Inch
- Still a relatively new exchange.
- Could “fall out of fashion”.
PancakeSwap gained immense popularity in early 2021, when transaction fees on the ETH network reached astronomical heights.
The exchange is built on the Binance Smart Chain (BSC) blockchain. You will not find cryptocurrencies of the ERC-20 standard on it, only BEP-20.
It was launched by an anonymous group of developers who were tired of the high fees on other decentralized exchanges. But you pay for the luxury of near-zero fees with a smaller selection of quality tokens. Most of the already established and proven projects run on the Ethereum network. On BSC, you’ll find the newer hits of the season.
The interface is intuitive and reminiscent of Uniswap or SushiSwap.
Benefits of PancakeSwap
- Almost zero swap fees. Cheap liquidity mining.
- Both the exchange and the CAKE token are growing rapidly.
- A selection of cryptocurrencies you won’t find anywhere else.
Disadvantages of PancakeSwap
- A large number of well-known projects is not available there.
- Anonymous authors of the contract.
- Interested in learning more about PancakeSwap? We have a whole article about it!
SushiSwap is another “fork” of Uniswap. That is, it belongs to a group that decided to take advantage of the open-source code it offered. The Japanese-inspired exchange boasts improved liquidity mining through SUSHI bonus tokens.
It’s hard to say why SushiSwap counts among the best decentralized exchanges. It’s probably a combination of the interesting SUSHI brand and the relatively high liquidity, which allows to reap considerable interest.
After the launch of the cryptocurrency, the founder, known only as Chef Nomi, decided to sell all his tokens. This caused an uproar and for a time, SushiSwap was seen as a scam that robbed its investors.
By some miracle, however, the whole project bounced back. SushiSwap is an iconic platform, and the SUSHI token obtained from liquidity mining is being traded on most exchanges.
Benefits of SushiSwap
- Improved liquidity mining. Great interest and great rewards for providing capital for trading.
- Sufficient liquidity for trades.
- On the Ethereum network, where most of the established tokens reside.
Disadvantages of SushiSwap
- Tarnished reputation.
- Volatile price of the SUSHI token.
Balancer, like many decentralized exchanges, is also a fork of Uniswap. Just as SushiSwap decided to improve the way liquidity mining works, Balancer decided to redesign the entire system of liquidity pools described above.
Uniswap determines the price using a formula that recalculates the “level” in each pool. However, this may not always reflect the market situation.
Balancer aims to eliminate these inequalities by adding a number of modifications and rules that users can assign to their pools. For example, whether a pair will be encrypted or public. The ability to determine the weight of one side of the pair relative to the other, thus keeping the price fair, also comes in handy.
Balancer is a decentralized exchange that is better suited for more experienced users or small projects looking for a good place to price their token fairly.
Benefits of Balancer
- Wide range of liquidity pool modifications.
- It runs on Ethereum.
Disadvantages of Balancer
- More complex system, not for newbies.
Are decentralised exchanges worth it?
We wouldn’t be surprised if all these new terms made your head spin. The world of decentralised exchange is complex and places a lot of emphasis on the skills and responsibility of the user. As do, after all, cryptocurrencies and the blockchain itself.
Decentralised exchanges offer a great deal of freedom and anonymity, but this may not be a necessity for every investor. Even so, the DEX concept has already taken hold in the cryptocurrency world forever.