With DEX exchanges, gone are the days when centralized platforms were the only way to trade cryptocurrencies. The trend for decentralized crypto exchanges has started to penetrate the digital asset space. Numerous top decentralized exchanges use smart contracts and provide transparency to crypto companies and investors.
DEX exchanges have replaced the features of traditional trading, like order books for liquidity pools and Automated Market Makers (AMMs) that bring crypto buyers and sellers together based on volume. Today’s article dives deep into what DEX exchange is, how it works, the top 10 decentralized exchanges, and why they hold the top spot. Keep reading to find out.
What Is a DEX Cryptocurrency Exchange?
DEX exchanges are also known as decentralized exchanges. DEX uses smart contracts and works on a peer-to-peer model to allow trading between users. Liquidity pools are at the center for users to trade different pairs in different volumes. Because of lower compliance requirements, they are inexpensive for crypto companies and investors/traders.
With the Peer to Peer model, you can make crypto transactions directly without any hurdles. Your funds are under your control, and you don’t have to submit them to any intermediary or custodian. The transactions are regulated under self-executing contracts–smart contracts. DEXs are created to remove the requirement for supervision by a centralized party or third party.
As a user of DEX, you can rest assured of the transparency and privacy of your data, as all the transactions are recorded on the blockchain platform. Only the public addresses are visible. The best part is you don’t even have to share any personal information like address or name and can retain your privacy, which is not the case with centralized exchanges.
The usage of DEX has led to the optimization of token prices, swap fees and slippage, and better access to crypto trading. One thing to note here is that as DEX platforms allow P2P transfer and trading of cryptos, you cannot swap your cryptos against fiat currencies like US Dollar, Indian Rupee, Euro, etc.
Different Types of Decentralized Exchanges
DEX exchanges are built on the foundation of blockchain networks that work on smart contracts. There are three types of decentralized exchanges.
1. Automated market makers (AMMs)
Automated Market Makers (AMMs) work on smart contracts and solve the liquidity problem in the crypto market to enable cryptocurrency traders to execute trades without third parties. The idea for the existence of this type of DEX exchange came from the innovative mind of Ethereum co-founder Vitalik Buterin in his extensive paper on decentralized exchanges.
AMMs are based on the concept of blockchain oracles. It extracts information from blockchain and other platforms and sets the price of traded assets. AMM works on liquidity pools.
2. Order books DEXs
Order books compile records of buying and selling orders of specific asset pairs. Buy orders mean the participant is willing to buy an asset on the platform. On the other hand, the sell order indicates that the participant is ready to sell his assets in holding. The difference between these order books defines the difference between the market price at different points in time.
Order book DEXs are of two types: off-chain order books and on-chain order books. The off-chain order book enables trading by combining order books, while on-chain DEXs allow trading at a target price.
The DEX exchanges that use order books hold order information on the chain, and users’ funds are retained in the users’ own wallets. This kind of exchange allows interested traders to leverage their position through the funds borrowed from the lenders on their platform. Leveraged trading allows the participant to take larger positions with their capital. Although this opens the avenues to higher profits, the size of probable loss gets higher and might occur faster.
3. DEX aggregators
DEX aggregators use multiple codes of conduct and mechanisms to improve the liquidity of crypto exchanges. These exchanges aggregate liquidity from multiple blockchain platforms that minimize the slippage fees, swap tokens, provide the best prices for the traders and help them earn profits. DEX aggregators help solve the problem of liquidity matching SWAP orders for multiple DEXs.
DEX aggregators help traders improve their chances of profits and also save them from the adverse effect of price friction.
A List of Top Decentralized Exchanges (DEXs) of 2022
Now that we know what a DEX is and its types, it is the type to know the best platforms available for you to trade cryptos.
dYDX was established as a spot trading platform, but with time has also expanded to futures trading. It is considered one of the few niche platforms that offer low-cost futures trading in this space.
DYDX is a layer 2 protocol, a non-custodial decentralized crypto exchange that enables zero trading fees and 20x leverage on its trading platform. It also provides efficient protocol safety. Users can trade 37+ cryptos’ derivatives on this platform.
Uniswap was launched in 2018. It is a flexible exchange that gives more trading opportunities to traders during peak trading hours. The interface of Uniswap helps traders and developers earn profits and optimize swipe tokens.
Uniswap recently also launched the feature of Permit2, a token-approval mechanism that integrates ERC20 and NFT swaps into a single router. This ensures the smart contracts are not mismatched with Defi protocols and avoids the oracle problem.
3. Curve Finance
Curve Finance is a liquidity-matching decentralized exchange platform. It works on the AMM type of DEX to enable stablecoin trading. Automated market-making increases the efficiency of the platform and ensures regulated prices and minimum slippage fees. The smart contract process of DEX exchanges enables stable coin trading and allows the swapping of two or more coins.
There’s also built-in support for major coins like DAI, USDC, FRAX, USDT, and TUSD. Swaps among wrapped tokens like wBTC, wETH, and the wrapped staked Ether, stETH, are also available.
4. Integral SIZE
Integral size is a custom-built DEX platform that aggregates orders of large trades on on-chain DEXs and provides professional traders zero price impact and a 30-minute TWAP swap time for digital assets. TWAP trading is the unique feature of Integral Size.
Trading on large volumes on other DEX platforms is not a pleasant sight, but Integral Size ensures delivery at zero price impact. In case of large orders, this interface is 100x efficient and allows 5-minute TWAP exchanges.
5. Kine Protocol
Kine Protocol offers more liberty to trade on liquidity pools and at better rates. This platform also provides features to hedge losses from the volatility in the market. On this decentralized exchange, you can acquire 100x leverage with lower or zero slippages.
The main aim of the Kine protocol is to help investors trade derivatives in a faster and more convenient way. Investors also get options of going long or short on cryptos like Bitcoin, Binance Coin, Ethereum, and more.
According to Coingecko, Pancake Swap is a decentralized exchange that is built on the BNB Smart Chain and has the largest trading volumes among the decentralized exchanges. The users of this platform have access to blockchain protocols. It also reduces the translation costs of protocols that are built on ETH or Bitcoin.
If you trade or swap on the Pancake platform, you can earn the native coin CAKE. PancakeSwap has one of the largest users, with the number reaching 2 million on a monthly basis.
DODO aggregates liquidity pools to remove unevenness and enable efficiency. DODO also provides a gasless swap option (zero-cost swapping) on the Ethereum main net and BNB Chain. DODO’s decentralized exchange product suite consists of SmartTrade trading and aggregation, Crowdpooling/IDO, pools, and mining.
On this platform, traders enjoy competitive rates for trading. Since it’s an AMM, it can add liquidity to current pools and also helps the traders earn better profits. KyberSwap maximizes earnings and ensures that traders have complete control over their wallets to act immediately on good opportunities. Kyber Network can be integrated into decentralized applications (dApps), crypto wallets, and decentralized finance (DeFi) platforms.
9. Apollo DEX
Apollo recently went from centralized to decentralized, and it shows the importance of permissionless and trustless decentralized platforms. Traders can trade on the spot market and futures too at low prices on this platform. Its unique feature is the customizable interface that makes the trading experience more seamless for its traders.
10. Bancor Network
This platform is beneficial for AMM trading. Bancor gathers traders, developers, and liquidity providers in order to create a comprehensive market environment. With liquidity pools, liquidity provides a high yield with the option to trade more than 80 tokens. Using liquidity pools, traders can easily exchange their cryptos. Bancor is secure for users and has lower fees for swapping tokens using on-chain liquidity protocols.
Pros and Cons of Decentralized Cryptocurrency Exchanges
Here are the pros and cons of DEX exchanges that you need to know before trading on them.
Pros of DEX
- NO KYC/Identification Required: Since DEXs are permissionless exchange platforms, you don’t need KYC or identification proof to create a project or trade. You can access DEX securely without creating on-exchange accounts. This makes the process quite easier and quicker and protects your privacy, too.
- A Wide Range of Tokens to Trade: DEX allows users to trade a vast range of coins, including rare ones that are hard to find on other generic platforms. From the most popular to the more obscure, you will find all coins on a DEX exchange platform. In many cases, DEX also brings coins that are not available due to country restrictions.
- No Intermediary Risk: Since the wallets and personal information are not given to the third party, DEX is a secure platform for traders with no intermediaries. DEXs also don’t allow volume manipulation by crypto whales to secure the interest of small investors.
Cons of DEX
- Niche Knowledge is Needed: Decentralized platforms are different from traditional platforms for a reason. There is no hand-holding, and you need to know the nuances before diving into trading on these exchanges. A wrong step can make you lose your funds, so make sure whatever you do it’s not guessing and making unmediated moves.
- Slow Order Matching is Possible: Decentralized exchanges may not always be high-speed while trading as it depends on the miners/validation of the blockchain and not the exchange. Thus, you have to be ready for disruptions in speed. Low throughput caused by the slow order matching has also directed some users toward centralized exchanges. Also, a high influx of users also reduces the speed of trading on DEX, which needs to be improved.
- Smart Contract Problems: Smart contracts that are not built with meticulous processes can lead to problems on the DEX exchange. That is because, even though smart contracts are based on tech, they are created by humans, and thus human error can disrupt the system. Smart contracts also allow only buy and sell order units; there are no advanced options like stop losses, margin trading, and more.
DEX exchange is a platform that allows trading without third parties and maintains your personal information secrecy, which is a big problem on traditional crypto exchanges. Decentralized exchanges provide efficiency and better rates, and you can trade with enhanced liquidity. The unique features of DEX have made it quite popular, and we can expect more improvement and innovation in the coming years, which may revolutionize the way you trade cryptos.
1. Which decentralized exchange is the best?
There are many top decentralized exchanges like UniSwap, dYDX, Curve Finance, and more, as we talked about in this blog. The best-decentralized trading platform can be anyone depending on your need, knowledge, or speed of the same. Some of these platforms provide better rates, while others have protocols to hold your secrecy in place. The answer depends on your research and what yields the best results for you.
2. Are decentralized exchanges legal?
Yes, decentralized exchanges are legal, but it depends on the country. While some countries have legalized it, some are yet to undertake this step. Some exchanges can be restricted as per the jurisdictions of different states too. We suggest being aware of the laws of your country before using the platform.
3. Do you pay taxes on a decentralized exchange?
Some countries require traders to pay taxes on the earned profit on crypto. In India, you must pay 30% capital gains taxes on transacting digital assets. irrespective of the nature of the income.