What is a DEX or Decentralized Exchange?
Personal finance, non-custodial, intermediary financial institutions – aka banks – and taking over your financial endeavors. All of these are key phrases surrounding any decentralized exchange argument.
A Decentralized Exchange, or DEX for short, removes the conservative barriers of one-to-one trades and, in a sense, puts the word “the Unbanked” on everyone’s radar.
These exchanges show no interest or enthusiasm for collecting user data and information unless in unique situations. Instead, they persist in posing as a waypoint for peer-to-peer non-custodial trading facilitators.
History of DEX
For as long as there have been humans, there’s been trade and marketplaces. From the barter system to the emergence of coins and paper-based currency traded in bazaars or intermediary institutions, we’ve always found a way to exchange goods and items of worth in some kind of physical location.
Today’s trading is undeniably influenced by cryptocurrency exchanges and has taken a surreal turn from what it was in the old times. Now blockchains inspired by the ideology of Bitcoin and Satoshi Nakamoto rule with an iron fist, upscaling and rendering traditional banking obsolete!
However, the first blockchain exchanges were not even close to the thought of “decentralized” as they required users to hand over their assets to the people or bodies in charge of the exchange – a soft betrayal in some of the original ideology believers.
So, in 2014, came in “NXT” announced they wanted to run a “decentralized exchange.” After that came the Counterparty with their interpretation of a decentralized exchange. Soon after, the first generation of DEXs began to evolve in late 2016 and early 2017, upgrading their tools and tokens to help the unbanked and DeFi enthusiasts experience the true meaning of “decentralized.”
How Does a DEX Work?
Decentralized exchange, or DEX, is an online peer-to-peer (P2P) crypto marketplace allowing traders to swap tokens without depositing them. It promotes trustless, digital finances and empowers bankless deeds and needs, ultimately giving a platform and power to the unbanked, which, by no means, are a minority!
In a DEX, the first step would be to synch a digital wallet such as MetaMask. Afterward, the automated coded smart contract kicks in to take over. It removes the need for the buyer and seller to communicate with each other. Everything – the buy and the sale – is set smart contract.
Different Types of Decentralized Exchanges
Three different types of DEXs rule the Defi sectors, which are as follows:
Automated Market Makers
“Automated Market-makers” or “AMMs” for short, first came into light back in 2018 with Uniswap, crowning itself as the first.
Today, a swath of market-makers underpinned by liquidity pools consisting of asset duos, trios, or even quadruples have designed their smart contracts and “money robots” for trades. These liquidity pools depend on liquidity providers – regular users who like farming more – to provide the necessary tokens for the trades to happen. One of the more recent ones, CrowdSwap, has – since January 2023 – become an AMM with the EDAT/USDC pair as our first official liquidity pool.
An order book is an electronic list of bids (purchases), offers (sells) orders for an asset or other instrument organized by price level.
Order books are used by almost every exchange to list the orders for different assets like stocks, bonds, and currencies — even cryptocurrencies like Bitcoin.
Wrapping all the DEXs available into one platform and exponentially cutting down on the number of routes and severity of costs is where DEX aggregators shine the brightest. They zip the results of different DEXs into one, providing some of the market’s best transactional options and routes.
Top DEX Platforms
This is a time-dependent matter, and personal preferences might change, making coming down on a definitive list a nearly improbable quest. However, here are some of the tried and true top DEX aggregators known to all:
CrowdSwap is a DEX aggregator as well, providing the much sought-after shorter crosschains and well-balanced prices to the community and the market. CrowdSwap is an up-and-coming DEX aggregator plunging our paddles into the surface of the DeFi sector. Eventually, CrowdSwap will find our calling and port alongside the very best in this sector.
CrowdSwap has developed features like the BPR (Best Price-routing), FLT (Fast Lane Transactions), the Portfolio Manager (in constant improvement), and many more to facilitate crypto swaps and crosschains. It’s also worth mentioning that we’ve achieved other titles of being a “dApp,” a “DEX or CrowDEX,” and a “Launchpad” called Crowd Sales, which are only the beginning.
When it comes to raw token numbers, 1inch provides roughly 2,500 tokens on its DEX aggregator dApp. This non-custodial decentralized exchange aggregator is not licensed to operate in the US because of its anonymity.
However, this Etheuerum-based DEX aggregator completes traders’ requests in one fell swoop, burdening users with a few clicks. In the back, however, 1inch sophisticated algorithms quick-draw multiple routes and liquidity pools and sorts them out to find the best price available.
Another Ethereum-based project, Uniswap is an open-source project, an AMM, and with a smart contract. The primary use of this dApp is for ERC-20 tokens trade. Users can list their tokens on this leading decentralized crypto exchange. And, if anyone knows how, they can copy their smart contract codes (because it’s an open project) and create their own decentralized exchange.
Uniswap’s token is called UNI, which is used for governance.
Another vastly popular decentralized exchange is Curve. Curve decentralized exchange is effective against slippage and impermanent loss and offers low gas fees.
Curve sets itself apart from other AMMs by only allowing liquidity pools consisting of similarly-behaving tokens like stablecoins, and that’s its key to successfully reducing fees and helping its customers withstand the harmful effects of LP farming.
- Pancake Swap
An automated market maker built upon the Binance Smart Chain or BSC. This means that it operates on a less congested network which ultimately can help the pocket of traders and the speed with which their transactions are carried, compared to the Ethereum block.
Like any AMM, it provides its users with liquidity pools and farming opportunities to earn returning fees. Pancake Swap has also released its token, CAKE, used in its governance.
Another Ethereum beneficiary, the dYdX platform offers a range of other features, including limit orders, stop loss orders, and the ability to trade perpetual contracts.
dYdX also offers a governance token, DYDX, which can be used to vote on proposals related to the platform’s development and future direction. The DYDX token is also used to incentivize liquidity providers on the platform.
Advantages and Disadvantages of Decentralized Exchanges
Sometimes, with great trading powers come great challenges and benefits. That’s precisely the title we’re discussing here: the Pros and Cons of decentralized exchanges.
Although DEXs boast in their transparency and trustlessness, threats like hacks, scams, impersonations, theft, and much like these sometimes drag the positivity away from decentralized crypto exchanges.
Advantages of Decentralized Exchanges
However, first, let’s take a quick look at the benefits of decentralized exchanges:
Decentralized exchanges are vastly famous and praised for their transparency inherited from the blockchain space.
Every last transaction and asset relocation through DEXs is apparent and available on the chains sponsoring total clarity and transparency. Nothing is hidden when working with a DEX.
- Private Key Freedom (Security)
In striking contrast to centralized exchanges, no private keys need to be shared with a DEX platform when conducting any token swap. The user’s private keys are kept in their wallets and are not held by the exchange.
Everything works around personal wallets and connecting them to the platform. With DEXs, there’s no need to worry about counterparty risk and considerations. If a CEX gets hacked, all the assets are lost. That’s not the case when trading through a DEX because all assets remain in the user’s grasp and in no one else’s.
- No KYC/ID Verification; for Most Parts
DEXs are trustless bodies, meaning users’ funds, privacy, and limited personal data is well preserved.
Routine day-to-day swaps, crosschain swaps, and DEX activities do not require DeFi users to share their information, increasing their safety and security. That also goes for most other aspects of a decentralized platform in crypto.
However, that’s not the case, as some operations – such as a Launchpad project – may require KYC modeling. Being as it may, decentralized exchanges have lower entry barriers in general, giving straightforward and fast accessibility to thousands of tokens ready for trading.
- Lower Costs
No middle agencies, intermediaries, and no one to charge astronomical fees. Results: lower costs in the decentralized finance world!
In the DeFi sector, determining swap routes and liquidity pools rest on the shoulders of self-executing smart contracts, which ultimately decreases the costs and makes DEXs more desirable options for trading.
- Many Tokens to be Traded
While the CEX platforms usually focus on the main hot-and-busting crypto projects and their tokens, smaller less-in-the-spotlight tokens can be founded and traded on the DeFi platforms. This helps newer projects get the push they need and make a name for themselves. Users also enjoy a seemingly endless list of crazy and unheard-of assets which make up for endless opportunities.
- Room for Every Mind
Decentralized exchanges don’t discriminate when it comes to crypto exchange on their platform because the doors are open to everyone. Users and crypto-fans are not forced to share their personal data and expose their privacy to traditional systems like banks or CEX to be deemed eligible for a simple transaction.
This feature ignited the spike of new cryptocurrencies being created and offered on various DeFi centers. Meaning less censorship and more risk-taking and creativity.
Disadvantages of Decentralized Exchanges
These represent the challenges to the DEX platforms and, in some cases, facing the DeFi.
- Not Being User-friendly
It’s not an uncommon scene to run up to a DEX user and hear them vent about the complexity and usability issues that come with decentralized exchanges.
Keeping track and safety of multiple wallets (sometimes) and their passwords can be tricky and, to be quite frank, half of the time, a real pain!
Also, compared to the CEX platforms, which are more mainstream – although slowly losing steam in the past few years to their traditional – DEXs are quick to frustrate users with uneasy learning curves.
This issue is prevalent among newer users casually strolling into the somewhat complicated DeFi hoopla.
- Security Issues
We mentioned the hardship of memorizing usernames and passwords, but we didn’t mention what would happen if something went astray with them. Although decentralized exchanges are highly transparent about their transactions and take security preparations encoded in their smart contracts very seriously, in case of scams or hijacks, there’s basically nothing users can do.
If their credentials fall into the wrong hands through malware, they become like lambs to the slaughter. No authority can guarantee the returns of their stolen assets in such cases; even keeping track of them has been proven impossible!
- Liquidity Inadequacy
In the wake of user influx and new people rushing into DeFi, liquidity shortages began to show themselves. On top of that, despite the spirit-lifting wave of new users, the majority of liquidities still reside in the centralized sector.
Another reason for low liquidity volumes could be the lack of a prominent authority figure, which dissuades possible liquidity providers from investing their assets in a liquidity pool.
Where there’s not enough liquidity, the trade risks ramp up! Although the new wave of DEXs has upped the priority of liquidity presence, still, the aftermaths of low liquidity volumes – like price slippage or price impact – still slap some users on the wrist before migrating to the DeFi space.
Tips for Using Decentralized Exchanges
By now, you know the frustration with bank processes and having shady boogeymen middle with one’s investments – even in CEXs – has fueled the train of DEX adoption. People are slowly warming up to the idea of taking control of their own finances and assets and not waiting for an intermediary entity to write their future.
How to Interact with a DEX (Challenges for DEX)?
Here’s where the irony strikes: having wave of infused and passionate users with no idea of the decentralized crypto processes halts the process. Although DeFi is for everyone, and we’re always striving to make it accessible and easy for everyone to understand, a bit of beforehand knowledge and updating oneself with the technical facades of DeFi will come in handy.
After reading up on the decentralized exchanges and how their crypto exchanges happen, the time comes to choose the right one. Many DeFi exchanges and platforms offer competitive options and costs, but not all can benefit you and your needs. For example, CrowdSwap finds the best routes and prices for swaps, crosschains, or other asset replacement features while providing yield farming and staking opportunities. Another DEX might not put much effort into tools and, instead, focus on its pools or vice versa. Finding the right one is key to your successful and memorable DeFi experience.
Decentralized exchanges are relatively safe and trustworthy, but wherever mass investments flow, so will scammers, thieves, and ill-intended wrongdoers. It’s best to be prepared and follow security instructions to the letter, for when a transaction is done in a decentralized exchange, there’s almost certainly no comeback!
Choose an exchange that suits your needs. Many decentralized exchanges are available, so it is vital to carefully research which one will work best for you. Some exchanges offer more advanced trading features and tools, while others may be better suited for beginners.
Future of Decentralized Exchanges
Brushing off decentralized exchanges will cost greatly because their future is bright and promising.
As a DEX and a DEX aggregator, we take pride in working hard to become the future of decentralized exchange and tackle the problems of this sector. We aim to expand the depth of the DEX reach and spread the word about decentralized finances.
DEX and DEX aggregators are the way to go: trustless, relatively secure, low costs, and crops of tokens available on them. Their impact on the blockchain and cryptocurrency realm alongside the traditional banking/intermediary system has been undeniable, even in their youth stage.
What lies from now on, it’s just a steep ascend to providing everyone, and not just the unbanked, with the means and tools necessary to become their own banks and take custody of their financial belongings.
What’s a DEX?
Decentralized exchanges are non-custodial services operating on the blockchain in a decentralized peer-to-peer fashion removing the central figures from the asset relocation equation.
What are the benefits of a DEX?
Anonymity, transparency, more tokens and altcoins, more security, relatively lower prices, and no private key sharing with a centralized figure.