Decentralized exchanges have emerged as viable alternatives to centralized exchanges over the past few years. In this article, we go in-depth into what decentralized exchanges (DEX) are, and how they function.
- Decentralized Exchanges (DEXs) bring buyers and sellers together and allow them access to trade without intermediaries.
- Due to the decentralized nature of DEXes, there are no central authorities to regulate transactions
- There are lots more tradable coins on decentralized exchanges. This makes them the ideal platforms for most crypto enthusiasts.
Before the emergence of DEXes, Centralized Exchanges (CEXs) like Binance, Coinbase, and LocalBitcoins took the lead role in cryptocurrency exchanges. However, most centralized exchanges operate in a manner that is similar to a bank. Buying and selling digital assets on CEXes requires stringent measures.
As part of the operations of centralized exchanges, third-party services are employed to hold users’ assets during transactions, thus limiting their control during the trading process. Additionally, most CEXes hold users’ assets on their platforms. An identified problem with this approach is that constant hacks and malicious acts usually leave users at risk of losing their assets.
Then came Decentralized Exchanges (DEXes) which offered an alternative in terms of control over one’s assets. But what do DEXes stand for, and how do they operate?
Let’s dive deeper!
Decentralized Exchanges Explained
As the name suggests, Decentralized Exchanges (DEXs) operate in a decentralized manner, without any interference from a third party. In contrast to centralized exchanges (CEXes), decentralized platforms are non-custodial, meaning a user remains in control of their private keys when transacting on a DEX platform.
Decentralized cryptocurrency exchanges allow users to conduct peer-to-peer (P2P) transactions. This process relies on automated smart contracts. It is also important to note that not all decentralized exchanges have the same infrastructure. DEX gives users the privilege of privacy as it is considered anonymous and comparatively cheap via the principles of automation and self-regulation. Another advantage of a DEX is that it makes the risk of hacking almost impossible. Additionally, on DEXes users have full control of their wallets and funds.
Here are some of the top cryptocurrency decentralized exchanges for Africans:
Founded by Antonio Juliano in 2018, dYdx stands out as a platform that provides decentralized peer-to-peer shorts, perpetuals, lending, and options trading for Ethereum-based tokens. Most popular for short selling and derivatives, dYdX is built on the Ethereum blockchain and runs on the layer-2 protocol of the Ethereum network.
Derived from the mathematical notation for a derivative, dYdx uses a combination of low fees, coin rewards and perpetual futures contracts to gain an edge over other similar decentralized crypto exchanges. dYdX momentarily became one of the leading decentralized exchanges (DEX) by 24-hr volumes following the launch of its governance token on September 8, 2021.
As of the time of this writing, dYdX is seeing over $2 billion in daily trading volumes. dYdX supports an array of trading strategies which include the following;
- Short sells allow investors to profit on price decreases and can be used for speculation or to hedge existing positions
- Fully-collateralized low-risk loans for short sellers allow token holders to earn interest fees
- Options can be used to hedge positions, manage volatility, increase leverage, and more
Launched in November 2018, Uniswap became the first widely-used permissionless Decentralized Exchange that enabled users to trade Ethereum-based tokens directly through a web 3.0 wallet; without any deposits or withdrawals to a centralized order book.
Uniswap provides a one-stop shop for exchanging any ERC20 token with a few clicks without having to worry about KYC, custody, or phishing. By leveraging smart contracts, Uniswap is able to offer autonomous on-chain transactions at marginal costs. Due to its underlying mechanisms, Uniswap’s liquidity pools also have little to no price impact for the vast majority of transactions.
How does it work?
Uniswap removes the concept of order books in favor of an automated market maker or “AMM” for short. Rather than specifying what price to buy or sell at, users merely select an input and output token while Uniswap provides the best possible market rate. Simply connect a web 3.0 wallet like Metamask, select the asset you want to trade, and the asset you wish to receive. Uniswap automatically processes the transaction and updates your wallet balance.
PancakeSwap is a decentralized exchange for swapping BEP20 tokens on the Binance Smart Chain. It is regarded as one of the most popular decentralized applications (DApps) of all time. In less than a year, it has become by far the dominant DEX on Binance Smart Chain, even eclipsing Binance’s own Binance DEX, with over $100 million in 24-hour trading volume.
PancakeSwap uses an automated market maker (AMM) model where users trade against a liquidity pool. Such pools are filled with users’ funds. They deposit them into the pool, receiving liquidity provider (or LP) tokens in return. They can use those tokens to reclaim their share, plus a portion of the trading fees.
The LP tokens are called FLIP tokens. PancakeSwap also allows users to farm additional tokens – CAKE and SYRUP. On the farm, users can deposit LP tokens, locking them up in a process that rewards users with CAKE. Users can stake CAKE tokens to receive SYRUP, which will have further functionality as governance tokens (and as tickets in lotteries).
PancakeSwap platform is designed to allow users to securely trade BNB and a massive variety of BEP-20 tokens without relying on centralized services or losing control over their private keys. As a decentralized exchange, all trades on PancakeSwap are automatically executed via smart contracts — completely eliminating counterparty risks.
SushiSwap is an Ethereum-based automated market maker (AMM). SushiSwap relies on liquidity pools where users can lock up assets in smart contracts, from which traders can buy or sell assets. SushiSwap is a community-run project that relies on its native utility token, SUSHI, for governance and voting on major protocol developments.
SushiSwap sets itself apart from Uniswap, the original protocol from which SushiSwap copied its code in September of 2020. Since pseudonymous developer Chef Nomi started it as a direct clone of Uniswap, SushiSwap shares a nearly identical source code, except for notable “community-oriented” features that SushiSwap has added, such as staking rewards and a governance token.
Anyone can use SushiSwap’s user-facing web applications to swap tokens on the SushiSwap DEX. When exchanging tokens, a 0.3% fee is charged with 0.25% going back into the liquidity pool. This means that as more exchange transactions are performed, the total supply of tokens in each pool increases. The remaining 0.05% of SushiSwap’s exchange fee fuels the platform’s staking mechanism, SushiBar, providing yet another yield farming opportunity for platform users.
Overall, SushiSwap has made — and continues to make — significant and proactive efforts to prioritize the wants and needs of its community thereby differentiating itself from many other DEXs.
Curve Finance is one of the largest DeFi platforms in the world. It is headquartered in Switzerland. Founded by Michael Egorov in January 2020, Curve Finance is a decentralized exchange (DEX) built on the Ethereum cryptocurrency network. It focuses on exchanging stablecoins and other stable pairs at a low fee and minimum slippage using an Automated Market Maker (AMM) protocol.
With just under two years of existence, the ease of upping the ranks has portrayed the increasing potentials of Curve Finance in terms of usage, authenticity, and adoption. As of August 2020, with just months of operating, the exchange boasts over $1 billion worth in deposits, running a daily trade volume of over $60 million.
Curve Finance rewards you for crypto held in your wallet after you have made an exchange and also rewards users who provide liquidity to the decentralized token pool that it operates. Liquidity providers get a portion of the token exchange fees and claims of the native governance token, CRV. They also get an extra share of earnings from Curve Finance integrating their liquidity pool with some third-party DeFi projects.
Speed, efficiency, and continuity were instrumental to the success of Curve Finance as the use of a decentralized liquidity pool and an automated market maker (AMM) protocol was incorporated to swap between coins and reinforce the liquidity of its markets.
Which Blockchain is the most Decentralized?
According to the latest data from data aggregator Staking Rewards, Cardano is the most decentralized blockchain.
Cardano, an ambitious blockchain platform created by IOHK, has been on a quest to become the world’s foremost blockchain platform, used for everything from dApps to digital identity and blockchain voting. Over 21.75 billion ADA is currently staked on Cardano, representing 69 percent of its total circulating supply.
Are Decentralized Exchanges Safe?
There are certain limitations to cryptocurrency exchanges such as hacking and scam activities. However, DEXes are trustless, meaning users’ funds, privacy, and personal data are well preserved. Decentralized exchange users can easily and securely access a DEX without needing to create an on-exchange account, undergo identity verification, or provide personal information.
How does a Decentralized Exchange work?
DEXes operate without an intermediary broker for clearing transactions. Decentralized exchanges rely instead on self-executing smart contracts to facilitate trading. In the absence of intermediaries (banks, brokers, payment processors), DEXes take on a non-custodial framework and fulfill one of crypto’s core possibilities – fostering financial transactions.
What is the Difference Between Centralized and Decentralized Exchanges?
The difference is in the structure of operation. Centralized Exchanges are regulated exchanges where the platform controls liquidity and regulates transactions. Meaning that users have less control over their assets and have to trust and rely on the exchange completely. However, transaction execution on centralized exchanges can be super fast since users do not need to provide access.
Decentralized Exchanges on the other hand allow users to control their crypto funds by retaining access to their wallets. Users have total control over their assets and do not need to provide any KYC-related information before trading on DEXes. Additionally, there are no restrictions on trade volume.
The disadvantage associated with CEXes is that, in the eventuality of a hack, lots of user funds will be lost. DEXes on the other hand are complicated to regulate and also take a long time to execute orders.
Decentralized exchanges have come to stay. The extra level of privacy that they give users and the freedom to trade without restriction have made them increasingly important to decentralized finance.
But choosing which is better between DEXes and CEXes is all up to user preference. We will be bringing you a comparison post on this subject soon. In the meantime, keep enjoying the benefits of a decentralized exchange.