A DEX is completely different from the centralized model. Decentralized exchanges are simply pieces of software that allow people to trade cryptocurrencies directly with each other.
There are more than 100 DEXs out there – so how do you know which ones are best? In this post, we take a look at DEXs (decentralized exchanges) and list some of the top ones out there.
The first cryptocurrency exchanges were centralized. This means that a person or a company set them up, wrote the software and ran the servers. Software called matching engines derived a price by calculating the total sell orders and buy orders. This is an order book model. Normally, centralized exchanges charge a trading fee as a percentage of the trade, and that is how they make their profit.
Centralized crypto exchanges work pretty much like any other type of exchange for financial assets. If you want to use the service, you register and identify yourself with a passport or ID card. This can have some benefits: if you forget your password, for example, the exchange can reset it. And centralized exchanges also provide customer service in the form of a helpdesk.
A DEX is completely different from the centralized model. Decentralized exchanges are simply pieces of software that allow people to trade cryptocurrencies directly with each other. Some DEXs allow you to trade using other instruments, such as options or perpetuals, again with no central intermediary. This might sound impossible, so let’s take a look under the hood to see how they work.
How does a DEX work?
When you buy or sell crypto on a centralized exchange, there must be a counterparty – someone who wants to buy what you are selling, or to sell what you want to buy. On a DEX, there is no counterparty. Instead, crypto holders who want to make a return on their assets deposit pairs of tokens into a smart contract called a liquidity pool.
This means that buyers do not have to wait for someone to match their order. Trades are instant (or as fast as the blockchain will permit, as all transactions happen on chain). An algorithm determines the price of the token, depending on the level of demand.
There are various advantages to this approach:
– Login is via a wallet, so the centralized exchange does not store your personal details
– You hold your own keys, so no one can confiscate your crypto
– If a bad actor or a government forces the website offline, it is only the front end of the DEX that disappears. All transactions and the latest state of the DEX is on the blockchain, so someone else can easily reinstate the DEX by recreating the user interface
- Centralized exchanges can charge excessive sums to list a token. Anyone can create a liquidity pool for their token on a DEX
What are the most popular DEXs
Since Bancor launched in 2017, the number of DEXs has risen exponentially. The TVL (total value locked) in DeFi protocols as a whole has risen from $8bn in 2019 to more than $80bn today, and DEXs make up a huge part of this.
The CoinMarketCap DEX ranking lists more than 140 different decentralized exchanges. As of this week, the top three exchanges by volume were dYdX, UniSwap (V3) and PancakeSwap (the latter is a Binance Smart Chain DEX).
One of the most interesting changes in the DeFi sector as a whole has been the move away from Ethereum L1. Other L1 chains and also Ethereum L2 chains are taking an increasing share of the market.
dYdX in particular has shot up in popularity because it enables traders to use its L2 protocol built with Starkware to sell perpetuals for very low fees. The high gas price has driven many traders away from Ethereum L1, at least for the moment.
What are some of the other DEXs and why are they different from each other?
Trader Joe offers more than 150 different pools on the increasingly popular Avalanche L1 network.
Balancer describes itself as an automated portfolio manager and trading platform. It is Ethereum-based but offers trades on Arbitrum and Polygon L2s.
This DEX platform, built on the KyberNetwork liquidity protocol, offers a choice of more than 20,000 tokens across the Ethereum, Polygon, BSC, Avalanche and Fantom networks.
Oasis focuses on the user experience, to make DeFi a less daunting prospect. Within the app, you can borrow DAI, lend and trade
Compound is a lending protocol based on Ethereum: in other words, it is a specialized kind of DEX
Allows investors to trade and earn yield on Polygon. Also offers a selection of different projects via their Launchpad
A decentralized liquidity aggregator designed for swapping between stablecoins
Ref Finance is a collection of DeFi protocols, powered by smart contracts on NEAR
Raydium is built on the Solana network and offers access in its liquidity pools to hundreds of Solana-based tokens
DeFi tools and products operating multi-chain across ETH, BSC and HEXO
Offers swapping and staking across the Fantom network, and also bridges to Ethereum L1 and L2s
1inch is not strictly a DEX but rather it is an aggregator of DEXs, which finds the best price and allows users to trade across multiple exchanges