Top 5 Decentralized Exchanges in DeFi
The use of decentralized exchanges (DEXes) is very popular among individuals involved in trading with cryptocurrencies, in contrast to centralized exchanges, such as Binance and Coinbase, which is a central authority controlling. With DEXs, you can trade cryptocurrencies directly, between its users and have complete control over accounts without the need for third parties through an automated market model. You can be satisfied with enhanced security and transparency in controlling your funds through this method.
What is a DEX (Decentralized Exchange)?
Cryptocurrency trades in a DEX (decentralized exchange) are done directly between users without intermediaries to intervene in transfer or custody, so brokers, banks, and payment processors are not needed.
If you want clear visibility into your fund movements without dealing with a third party that has limited insight into their actions like in traditional finances, you can choose a decentralized crypto exchange. Also, user funds in DEXs don't move through any third party's crypto wallets during trades. This helps minimize counterparty risk and reduces systemic centralization attacks in the crypto field.
Within DeFi, DEXs play a crucial role in which more sophisticated financial products can be developed with their permissionless composite properties.
Network costs and trade fees - are required two sorts of payments from decentralized cryptocurrency exchange users, when the cost is acquired to gas consumption during on-chain transactions as network fees. Trading charges are collected by liquidity providers and token holders due to their respective shares under the protocol's specification.
The vision for multiple DEXs centers around creating an end-to-end on-chain system that can be accessed without requiring any formal permissions or being centrally owned, and administrative privileges for protocols are commonly overseen by a decentralized autonomous organization (DAO), comprising different stakeholder groups who vote based on consensus when important decisions arise regarding the management of such protocols.
How do Decentralized Exchanges Differ from Centralized Ones?
Cryptocurrency centralized exchanges (CEXs), such as Coinbase, Bitfinex, or Kraken, have a similar organizational structure to traditional stock exchanges. They are managed by certain legal entities that are responsible for the operation of the platform, the protection of user funds, and compliance with laws.
That is why the administrations of centralized exchanges have access to customer funds and can, if necessary, block a user account, a specific operation, or even a whole type of transaction, for example, the withdrawal of funds.
Decentralized exchanges, unlike centralized ones, do not act as an intermediary in transactions and do not store the funds and personal data of users. Clients are identified using blockchain addresses and non-custodial wallets that connect to the application. The exchange of cryptocurrencies is carried out utilizing smart contracts.
In addition, in several decentralized exchanges, decisions are made by the community of token holders, and not by the team of founders and developers, by voting in the DAO. However, there are DEXs where a key developer is involved in the creation and development of smart contracts and application protocols. The source code for the main components of decentralized exchanges is open to everyone.
Decentralized exchanges are the most important type of application in the DeFi space. There are currently over 200 DEXs running on dozens of blockchains.
When did Decentralized Exchanges Appear?
Initially, cryptocurrency trading was centralized. In 2014, the first decentralized exchange appeared, which was called NXT Asset Exchange. Similar projects were also created, including Counterparty DEX and Block DX, however, they were not widely adopted.
During the ICO boom in 2017-2018, many new crypto assets appeared on the market. They were frequently traded on new DEXs such as EtherDelta, IDEX, DDex, and others. The main blockchain for running DEXs at the time was Ethereum, and the tokens they supported were ERC-20 compliant. Despite this, DEXs have faced the standard problems of low liquidity, large price gaps, slow speed, and too high transaction fees.
The Automated Market Maker (AMM) technology made decentralized exchanges popular. Instead of traditional order books, AMMs use liquidity pools that contain pairs of assets, and prices are calculated using a mathematical formula based on the ratio of assets in the pool. This provides a decentralized architecture and allows the execution of transactions through smart contracts on the blockchain at a high speed compared to the speed of centralized exchanges.
The first project to implement AMM technology was Bancor. However, the decentralized exchange Uniswap, launched in 2018 on the Ethereum blockchain, with the support of Vitalik Buterin, brought real popularity.
Later, the DEX-AMM model became the basis for most decentralized exchanges, it was adopted for applications on other networks, including BNB Chain (PancakeSwap) and Fantom (SpookySwap). AMM-DEX also works in Solana, Cosmos, Terra, and other ecosystems.
Liquidity providers who contribute their assets to pools receive commissions for each asset swap of the respective pair made through the pool. In addition, AMM-DEX gradually added other features, such as farming, in which liquidity providers automatically receive governance tokens. They can then be staked, used to participate in the DAO, or simply sold.
Starting in 2021, a new generation of decentralized exchanges (DEX) has emerged that also use AMM technology. But unlike previous versions, they allow you to exchange crypto assets between blockchains. For example, the Symbiosis Finance protocol implements this feature using synthetic tokens, which are "wrapped" versions of tokens on other blockchains.
Another approach is offered by DEX from the THORChain project, which uses pools of native assets in different blockchains for exchange.
5 Best Decentralized Exchanges in DeFi
We will delve into some of the famous DEXs in the DeFi space, including Uniswap, Curve Finance, PancakeSwap, Balancer, and dYdX. We'll explore their unique features, similarities, and differences, as well as their security measures, network deployment, and use of native tokens.
Uniswap is a DEX that uses Ethereum-based token trades, utilizing an Automated Market Maker (AMM) model, founded on November 2, 2018, by Hayden Adams. With the AMM model, users contribute tokens to liquidity pools, which are algorithmically set and determine market prices based on supply and demand, rendering order books and centralized matching engines unnecessary. Instead, Uniswap employs a constant product formula to calculate the exchange rate between two tokens.
The initial version of Uniswap, Uniswap V1, was a basic AMM that allowed users to swap tokens on the Ethereum network. Uniswap V2, released in 2020, was a more advanced version with features such as flash swaps and improved price oracles. Uniswap V3, launched in 2021, introduced Concentrated Liquidity, enabling liquidity providers (LPs) to concentrate their liquidity in specific price ranges, reducing slippage and improving capital efficiency.
Uniswap V3 charges a 0.3% fee per transaction, with 0.25% allocated to the liquidity provider and 0.05% going to the DEX treasury. The platform's AMM model and Concentrated Liquidity feature make it highly capital efficient, enabling peer-to-pool trading and reducing the need for large amounts of capital to be locked up.
The exchange has a native token, UNI, used for governance and decision-making. UNI holders can vote on proposals that impact the protocol's development, including fee changes and token additions. Uniswap supports multiple networks, including Ethereum, BNB Smart Chain, and Polygon, and is compatible with several wallets, such as Metamask, Trust Wallet, and Coinbase Wallet.
Curve Finance is a decentralized exchange (DEX) that focuses on swapping between stablecoins and tokenized versions of coins. It has gained a reputation as the "Uniswap for stablecoins" due to its emphasis on stability and low slippage during times of high volatility. Launched in 2020, Curve has become one of the top DEXs in the DeFi space.
Like Uniswap, Curve uses the automated market maker (AMM) model to provide liquidity and facilitate swapping between stablecoins. However, Curve's focus on stablecoins has made it an attractive platform for users who want to trade stablecoins without the risk of price fluctuations.
Curve supports some of the most popular stablecoins, such as USDT, USDC, DAI, BUSD, TUSD, and sUSD. In addition, Curve allows for swapping between different tokenized versions of coins, such as WBTC, renBTC, and sBTC, making it a versatile platform for crypto trading.
The CRV token is the native token of Curve Finance and serves as a governance token for the platform. Users of CRV can vote on proposals on the development and direction of the platform, to earn rewards and take part in liquidity mining programs.
Curve Finance is supported on several networks, including Ethereum, Polygon, and Fantom, allowing users to access the platform from different chains and take advantage of the lower transaction fees and faster transaction times offered by some networks. Curve also works with several popular wallets such as MetaMask, MyEtherWallet, and Trust Wallet, among others, to enhance the user experience.
PancakeSwap is a DEX that operates on the Binance Smart Chain (BSC), providing users with an accessible and low-cost option to trade cryptocurrencies through its platform one of the most successful decentralized exchanges that can be found within DeFi today is PancakeSwap which first began as an offshoot from Uniswap back in 2020.
Several upgrades have been implemented on PancakeSwap since the time of its launch and are presently at the V2 stage offering a modernized UI design to aid with functionality in addition to prompter trading experience while continuously endeavoring for reduced rates on gas.
PancakeSwap's utilization of an AMM model permits it to offer liquidity to traders with little chance for price manipulation. Various kinds of trading with cryptocurrency are available on PancakeSwap with options such as BSC-native tokens for the users.
By staking their CAKE tokens in Syrup Pools, users have the opportunity to earn rewards. These pools offer a range of high-yield opportunities. Apart from being a decentralized exchange (DEX), PancakeSwap provides various additional features. These include an NFT marketplace, an NFT profile system, and Pottery - a lottery-style game where users can win rare NFTs.
PancakeSwap extends its support beyond the BNB Smart Chain and encompasses the Ethereum and Aptos networks as well. To access PancakeSwap, users can choose from a variety of wallets, including MetaMask, Injected, Binance Wallet, Coinbase Wallet, Trust Wallet, WalletConnect, Opera Wallet, Brave Wallet, MathWallet, TockenPocket, SafePal, Coin98, Blocto, and Ledger.
It is another AMM built on Ethereum introduced in 2019. Balancer stands out due to its numerous innovation-centered features and customizable options.
Pool operators can reap the benefits of Balancer's flexible nature by determining their swap fees and liquidity providers are motivated by these incentives to generate fresh pools and add value to the current ones. Both private and public pools are available in Balancer
The public pools of Balancer are accessible to anyone keen on supplying liquidity and the unchangeable state of pool parameters means that once a pool is established its token types, ratios, and corresponding fees remain fixed. The benefit of having a private pool is that you can change its flexible settings as an owner whenever desired and the responsibility of providing liquidity for the pool lies solely with its owner.
Smart pools include the advantages of shared and private pools with flexible parameters and allow Balancer users to participate as liquidity providers. This involves conditional investment strategies being encoded into a smart pool with dynamic control assets to allocate.
An important feature of Balancer is the Smart Order Router (SOR) that provides traders with the best prices for input and output tokens. With the SOR algorithm, you can consider different trading options (direct swaps within a single pool or a complex of trades within multiple pools).
Balancer provide different liquidity pool types to suit various needs, such as composable, weighted, boosted, stable, linear, liquidity bootstrapping, and managed protocol pools. You can choose the best option for your trading strategy.
BAL, Balancer’s native token, is utilized for governance and allows to vote on proposals for updates and changes of the protocol, holders also gain trading fees as a reward.
Balancer is supported on Ethereum, Arbitrum, Polygon, Fantom, and Optimism. You can access the platform utilizing MetaMask, WalletConnect, CoinBase, and Tally wallets.
Founded in 2017 by Antonio Juliano, a former Coinbase and Uber engineer, dYdX is a decentralized trading protocol distinguished by its in-memory off-chain order book, as opposed to an Automated Market Maker (AMM) system used by other platforms.
Operating on the Ethereum network, dYdX empowers users to engage in cryptocurrency trading with leverage of up to 10x, utilizing a range of trading products. These products include crypto margin trading and perpetual contracts. The platform also offers liquidity staking pools and dYdX trading rewards.
One significant advantage of dYdX's order book approach is its ability to achieve liquidity with smaller capital compared to an AMM, making it an attractive option for decentralized trading with lower capital requirements.
dYdX provides a comprehensive set of features sought by traders in a decentralized trading platform. Some notable features include:
- Cryptocurrency Margin Trading: With a leverage of up to 10x, dYdX enables traders to enhance their buying power and potentially increase their profits.
- Crypto Perpetual Contracts: Perpetual contracts, lacking expiration dates, allow traders to maintain positions indefinitely, making them ideal for long-term trading strategies.
- dYdX on Layer 1: Built on Ethereum's Layer 1, dYdX ensures security and reliability for users.
- dYdX on Layer 2: In addition to Layer 1, dYdX operates on Ethereum's Layer 2 scaling solutions through integration with StarWare's StarkEX, facilitating fast and cost-effective transactions for traders.
The dYdX protocol introduces its native token, DYDX, which grants users discounted trading fees. Holding DYDX tokens results in lower trading fees, incentivizing token ownership and fostering demand.
Although currently built on the Ethereum network, dYdX has plans to transition to Cosmos in the future. The platform supports various wallets, including MetaMask, Trust, Coinbase Wallet, imToken, TokenPocket, BitKeep, Rainbow, Coin98, iToken, and WalletConnect.
Through facilitating DEX trades with smart contracts and eliminating involvement from centralized institutions, traders can trust that their transactions occur just how they envisioned them. Traditional finance relies on procedures that could be subjected to potential censorial hazards. Decentralized Exchanges provide robust assurances around operations accompanied by heightened visibility into trading mechanics. If you are interested in creating a decentralized project, just сontact us, free consultation is available.