What is a decentralized exchange & how does it work?
Have you heard about crypto exchanges? How about letting you trade your digital crypto assets over the live blockchain – to increase Decentralization and unleash the true potential of cryptography?
These Decentralized peer to peer transactions need a protocol, a marketplace – a DEX – decentralized exchange – is the right platform we have been looking for! There are three essential aspects of the DEX:
1. Decentralized entity – An absence of a centralized stakeholder or custodian to manage and transact the assets.
2. Peer-to-Peer transactions – As transactions occur directly between parties, without the interference of any third agent – DEX promotes the P2P marketplace, with buyers and sellers in constant communication regarding the tokens.
3. Smart Contracts – Computer programs that ensure the legality of a transaction taking place between two parties. Under a certain condition, the smart contracts get executed – without the interference of a third party.
Now that we have clarity about the Decentralized Exchange, it is important for us to find out – how do they work? The operation of the DEX is very crucial – as it can help the stakeholders to understand the workflow – and how the digital assets are transferred between the parties.
The working of decentralized exchange works with four pillars:
1. Custody of Funds – The funds or the assets are stored with the parties doing the transaction. Usually in a wallet like MetaMask or Trust wallet. Unlike the centralized exchange, there is no central custody to store the assets.
2. Transaction Fees – In addition to the trading fee, the transaction fee is also levied upon the user for every transaction usually known as Gas. This is done to maintain the security of the blockchain in which the transaction takes place.
For Example: You’d have to pay gas fees in Eth when transacting on the Ethereum Blockchain, or Matic when transacting on the Polygon Network.
3. Smart Contract – As discussed, they are instrumental for entering into a transaction between two parties. Since there is no involvement of a third party to monitor the transaction, a smart contract plays a crucial role in the DEX.
4. Web3 wallet: For conducting any exchange on DEX, you must have a wallet that is protected by a seed phrase that holds all your private keys safely. The seed phrase is personal to you, thus, giving you complete control over your assets and should always remain confidential at all times.
Whenever one party is looking for transacting funds to the other party – a smart contract is signed between them, with the stated conditions – after which, the deal is finalized.
The order placement in a Decentralized Exchange (DEX) takes place using two methods:
- Order Book
- Automated Market Maker
Understanding the difference between centralized & decentralized exchange?
As the name suggests, the major difference lies in the absence of intermediaries in the decentralized exchange. It reduces the counterparty risk along with a lean fund-transfer mechanism – thus reducing dependency on a third party. A CEX, on the other hand, has complete access to the funds, and also controls the private keys. This means that the customers are not given any access to the private keys in CEX.
In the CEX set-up, the market makers and takers play a key role in the trading. These important features – especially customers lacking access to the private key – is the reason for the move towards DEX.
Benefits of decentralized exchange
The lack of a third party, in itself, is the biggest advantage of DEX. Few more benefits of DEX include:
1. Access to your private key: You have access to your private key. What it necessarily means is that you can make sure you have access to all of your assets – and not depend on a third party for the transaction.
2. Access to wider altcoins: An access to wider altcoins – as, unlike CEX, listing a coin on DEX is fairly straightforward. This means high trading volumes are not needed for a coin to be listed in the DEX.
3. Cheaper transactions: The transactions are cheaper – close to 0.3% for Uniswap. Lower transaction fees mean a lesser burden on your wallet while making the P2P transactions.
4. Less potential for cyber crimes: Hacking seems quite unusual in the DEX. Since the funds are not held in the central exchange or repositories, they are not prone to cyber-attacks. Also, the lack of a centralized exchange, with which the private key is shared, reduces the chances of your private keys being exposed to hackers. Although this opens doors for smart contract exploits, but those are quite rare.
What to Look for in a Decentralized Exchange
Though there are a set of things you must look into while selecting your DEX, one major concept is slippage. Slippage is the change in the price of the crypto coin, based on the volume of transactions.
A negative slippage would result in devaluing of the coin being traded – which is why – the transaction volume in the DEX should be a significant component, you must look into.
Secondly, the ease of transaction, the security of the DEX, and trading fees should be next on your priority list.
If you are looking for a top-notch DEX – look for the following features:
- Excellent user interface
- Low transaction fee
- Copious trading pairs with peers
- Quick trades through an easy interface.
Top 10 decentralized exchanges in 2022 to watch out for
Protocols Supported: Ethereum, Polygon, Optimism, Arbitrum
Uniswap is one of the first DEXs that started its operations on the Ethereum blockchain in 2018. ERC-20 assets can be swapped instantly, with a simple click.
Uniswap is currently the largest Decentralized Exchange and currently ranks first on our list of top Decentralized Exchanges in 2022.
The underlying liquidity pool is open – which allows anyone to increase liquidity by supplying underlying tokens. Some features of Uniswap include:
1. The participants in the exchange don’t have to be aware of each other for a transaction to take place. This makes it a trustless DEX.
2. With no restrictions in terms of who can access the protocol, the DEX is permissionless, thus open to everyone in the public.
3. Every time a transaction takes place, with a trading pair, a trading fee of 0.3% is levied.
4. It runs on an AMM (Automated Market Maker) model.
Protocols Supported: Binance Smart Chain
Binance Smart Chain is the pillar behind this DEX, which offers transactions at a very wallet-friendly price. What’s even more exciting is the quick transaction which is feasible only with Pancake Swap. It is backed by the CAKE token, which has added benefits too.
Some of the cool features include:
1. Inclusion of the non-native assets using the bridge
2. All transactions are executed through your own wallet – thus no need to trust others with your own assets.
3. If you add to the liquidity pool, you are rewarded with LP Tokens. The results are cool gifts like discounts on transaction fees, thus encouraging high liquidity.
4. CAKE tokens can be utilized for Syrup Pools & to enroll in the lottery
5. Participation in NFT Marketplace using the Pancake Bunnies, Squads and many more.
6. The exchange charges a minimal fee of 0.25%, of which 0.17% goes towards the liquidity providers, 0.03% goes to the Pancakeswap Treasury and 0.05% goes towards $CAKE token buyback and burn.
Protocols Supported: Ethereum, Polygon, Optimism, Arbitrum, Aurora, Avalanche, Fantom, Harmony, Moonbeam (EVM chains.
If you are looking for high returns on the assets deposited in the liquidity pool, the Curve is the good DEX. Operating on the Ethereum backbone, it allows transactions in the multiple EVM networks. The governance token on the protocol is called CRV.
Some of the cool features include:
1. The liquidity providers are given the authority to add in new pools to improve liquidity.
2. CRV assists in improving the liquidity in the liquidity pool
3. Operation on this DEX works on the basis of smart contracts, through the exchange of tokens.
4. The specialty is in trading stablecoins over the Curve DEX platform.
If you are looking for a DEX platform with high liquidity, 1inch is the place to be. With 50+ DEXs connected with each other, this aggregator ensures that your tokens don’t reduce in their intrinsic value. With editable slippage percentage & gas fees, the users can influence the processing time too.
Some notable features of this platform include:
1. Splitting the coin and exchanging it in the best route, provides the perfect return, through a cost-effective exchange rate.
2. Zero transaction fee charged by 1inch platform. Only the fee as per the exchange rate is levied on the user.
3. 1inch Pathfinder offers the perfect route for exchanging cryptos at an excellent rate.
4. You can increase the returns by using the liquidity provider’s tokens on 1inch (LP tokens)
Protocols Supported: Ethereum, Polygon, BSC, Optimism, Fantom, Avalanche, and Optimism
Turbine Swap is a relatively new liquidity aggregator on the market. It supports large pools of liquidity across various networks like Ethereum, Polygon, BSC, Optimism, Fantom, Avalanche, and Optimism. Apart from ease of use and seamless integration of fiat on-ramping, Turbine Swap has one of the coolest and cleanest looking User Interfaces.
It is one of the fastest & best looking Decentralized exchanges of 2022.
Some notable features of Turbine Swap:
1. High liquidity hence low price impact for large orders ($100k+)
2. Support for multiple chains (ETH, BNB, Polygon, AVAX, Optimism, etc)
3. Ultra low 0.05% fees.
If real-time trading gives you the real kick, you should grab your seat on this platform. Being the first DEX to offer real-time trading opportunities, IDEX is based on the Ethereum network, which makes it a little too costly, when it comes to the transaction fees.
Some notable features of the platform include:
1. Features like gas-free cancels, and multiple order methods like limit & market orders.
2. Holding simultaneous trades, with multiple open positions at the same time.
3. Exchange is packed with a smart contract and a trading engine, to ensure smooth trading, with the most advanced trading platform.
4. The hybrid design for trade execution and the separate settlement requires users to use their private keys for trade verification.
5. Elimination of trade failures using the escrow account, along with locking of funds, till trade execution & settlement is completed.
6. IDEX 2.0 is the improved version that reduces transaction costs, with improved support for Bitcoins too.
Even if you are not a big fan of Sushi, this DEX has the right ingredient for success – the ease of swapping across more than a dozen of blockchains, with being one of the first to gain a positive reputation of being deployed at the earliest on new chains.,
Some excellent features for the DEX include:
1. It became one of the first exchanges to operate in the blockchains like Avalanche and Harmony
2. Users can contribute to the chain to contribute to the liquidity & collect swap fees in return
3. Awesome collection of yield pools for yield farming.
4. The token for this exchange is SUSHI – which can be amassed and staked to earn a percentage of the protocol fees.
If you wish to do transactions with less transaction cost and without much delay across the ERC-20 chains, then QuickSwap is the right one for you. This platform gives enough flexibility to the users – to swap either in the traditional ways or through limit orders. With $700M in locked liquidity, let us find out what this DEX has to offer for its users:
1. If you are a liquidity provider in this DEX, you can earn ample fee – as it rises to as high as $100K in liquidity fees/day.
2. Swaps are conducted within an instant – thanks to the the Polygon-based network
3. Dual mining options are also available for the MATIC pairs to earn some rewards quickly.
4. ERC-20 tokens can be traded using DEX on the Polygon sidechain, thanks to a simple bridge – thus avoiding Ethereum, and its high price.
Based on a forked out chain of Solana, the technology used by it is the artificial intuition – a different AI. Advantages include improved speed & efficiency – it forms the backbone for decentralized finance. Some of the awesome features include:
1. Cross-chain farming and staking as MetaMask gives access to Web 3 dApps.
2. Migration of the assets across Velas network using Swapz, a bridge for cross-chain transactions.
3. Advantage is that the user experience is similar to that of the Pancakes – making it simple for the users to operate it.
4. Galaxy Pools let you amass tokens, and earn a fee in return
5. Earn amazing prices and rewards with the space lottery in Astroswap.
6. Users can experience zero bridging fees for tokens being exchanged on the Swapz
If you’ve heard about the Solana network, then you should also know that Raydium is the largest Decentralzed Exchange on the Solana Network Ecosystem. Here are some of the reasons to choose this platform.
1. Raydium enjoys the perks of being built on a low gas network like Solana.
2. It boasts one of the highest liquidity across various tokens on the Solana Network.
3. Being built on Solana the transactions are fast, but the developers of the Raydium Exchange have made sure their UI is equally snappy.
Bottom line: Selecting the right DEX depends on your personal checklist. Our collection gives you an option to make the choice from. With the growth of decentralized finance, and the improved security being provided – DEX seems to be a better alternative for financial transactions. Make sure to read across the terms and conditions of the DEX, before signing up with one.