Decentralized cryptocurrency exchanges are abbreviated as DEX. DEX is the marketplace that offers users peer-to-peer trading sessions. These trade sessions are also done through specific non-custodial methods.
The plus point of these non-custodial methods is that it does not require any third person to authenticate and facilitate funds custody and transfer. The substitutes for the DEX are regarded as the brokers, banks, and other institutions which facilitate the payment process.
In DEX, the exchange of assets is facilitated with the help of blockchains with smart contracts for the transfer and custody of funds. this blog offers a complete set of information regarding the decentralized exchange and its working criterion. let go through the blog for a detail tour of DEX related information.
What Is A Decentralized Exchange (DEX)?
A decentralized cryptocurrency exchange is the kind of platform that is used for the trading, buying, selling, and other procedures of cryptocurrency. DEX has no central authority or third-party authentication system to verify transactions and liquidity provisions. The blockchain runs down the whole process to verify transactions and provide liquidity.
DEX (Decentralized Cryptocurrency Exchange) Vs. CEX (Centralized Exchanges)
DEX and CEX are the abbreviations for decentralized and centralized crypto exchanges. The fundamental difference is among the working criterion. The centralized exchange works under the central authority, while the decentralized exchange works as a decentralized platform.
An example of a centralized crypto exchange includes the most prominent names like Binance and Coinbase, which is convenient for new investors who need to become more familiar with the popular terms and working criteria. The decentralized exchanges are tagged for experienced users and investors who can go with the flow and have a sound knowledge of this field.
Comparison Of Traditional Financial Institutions (centralized exchange) and Decentralized Exchange (decentralized trading)
A visible difference exists between the traditional method of financial transactions and the working criterion of a decentralized exchange. In the proceeding lines, we have mentioned the significant differences between the two economic transactional methods.
Traditional Transactional Methods
If we compare the traditional methods of funds transactions, there is a whole system that uses third-party authentications and an opaque series of systems. This kind of financial transaction system gives minimal access to their methodology. If the same thing is observed in the different decentralized exchanges and multi chain decentralized exchange, the case is the opposite in the DEX.
Decentralized Exchanges
In decentralized exchanges, the series of financial transactions is entirely transparent. The users have access to the mechanisms which facilitate the economic exchanges to the movement of funds. Additionally, DEX does not require any authentication of third parties and facilitation through intermediaries.
The finance is transferred from the user’s wallet to the customer/buyer’s and must not be added to the third party’s wallet. In this way, there are chances of lower risk and margin trading, which can decrease the risk of systematic centralization in the cryptocurrency ecosystem.
Decentralized Finance (DeFi)
The decentralized finance is abbreviated as DeFi. It is used as the key money for Lego. On this key money, Lego, the whole building of other financial products is built, which are more sophisticated. This key money Lego is the outcome of the composability, which is permissionless.
Working Criterion Of DEX
Specific designs are used in the DEX. Each method has advantages, trade-offs, decentralization processes, and scalability. The two types are most common and famous.
- The first one is known as the Order book DEXs.
- The second one is known as an automated market maker, which is also abbreviated as AMMs.
- Certain aggregators with connections with many DEXs for getting the low gas cost and best price for any transaction are also commonly used as a separate category.
Tax Payments
Although the transactions on the decentralized are anonymous, public visibility is the point that can cause trouble for the investors. The investors have to report for their taxes.
Some institutions are working with governmental agencies to track investments and tax fraud. The biggest name among those companies includes chain analysis.
Benefits of DEX
If we talk about the benefits of DEX, certain benefits are enlisted in the proceeding lines. Let’s go through them.
1. Immutable Smart Contracts and Blockchain Technology
The biggest benefit of this run is based on blockchain technology and immutable smart contracts. This target is achieved by using determinisms of a high degree while using smart contracts and blockchain technology.
Compared to this, the CEX (centralized crypto exchanges), which includes big names such as Binance and Coinbase, offers the trade process to users, which uses the internal matching engines for the financial exchange.
The decentralized crypto exchanges manage trade through on-chain transactions and smart contracts. Additionally, DEX offers self-hosted wallets, maintenance, and custody of wallets.
2. Custody
The decentralized crypto exchange does not hold the custody of the cryptocurrencies. There is no interference of DEX in the transactional process as CEX does. This interference could cause the collapse of exchange like the FTX collapse.
The collapse can lead to the loss of investors. The DEX is void of any such system, so; there are meager chances of the collapse of the DEX.
3. Large sections
CEX has a time taking process for approving cryptocurrencies for trade purposes. DEX does not have a third-party authentication system, so the transactions on this platform are swifter and more significant in sections. Without delay, investors can buy, sell and trade in whatever amount of crypto they want.
4. Censorship Resistant
DEX does not have restrictions for censorship as there are no intermediaries in this system.
5. Liquidity
DEX has a high liquidity ratio because no third-party authentication system makes the transactions quick and swift. High liquidity is the most significant benefit of the DEX.
6. Reputation
Decentralized exchanges have a reputation for the easy and quick usage of cryptocurrency in the larger sections without any pending moment for the approval of cryptocurrency. This reputation pays for the best benefit of DEX.
Trading Fees Structure in Decentralized Crypto Exchange
There is a proper fee structure in the Decentralized cryptocurrency exchange. There are typically two types of trading fees.
- The first one is known as the trading fee.
- The second fee is known as the network fee.
Network fee
The on-chain transactions require a gas fee. This gas fee is known as the network fee.
Trading Fee
The trading fee, as its name depicts, comes under the umbrella of token holdings, liquidity providers mechanism, the underlying protocols for digital assets as well as the combination of the previously mentioned three categories. A trading fee is considered the kind of fee which is used for the designing purposes of any protocol and ecosystem.
Vision of DEX
There is a clear vision behind the invention of a decentralized crypto exchange. This vision includes:
- Permissionless access.
- End-to-end encryption.
- Ownership in a well-distributed community of decentralized stakeholders.
- Zaro failure ratio for central points.
The above-mentioned points make it very clear that the administrative rights of the decentralized protocol are under the governance of DAO (decentralized autonomous system). This decentralized autonomous system consists of the stakeholder’s community. This community votes for the decisions regarding protocols of a decentralized ecosystem. As per the percentage of voting, the protocol decisions are made.
Competing while having maximum decentralization protocol in a fully crowded DEX ecosystem is always challenging. The team behind the DEX landscape is not a random set of shareholders. The team of decentralized crypto exchange consists of a well-informed and experienced team capable of making sound decisions that can be beneficial in the long run.
For increased censorship, the best-decentralized exchange goes for the distributed governance protocols, which are suitable for the long-term resilience of the DEX landscape.
List Of Decentralized Exchanges
The best-decentralized exchanges, which make it possible to rank themselves among the popular decentralized exchange, are mentioned in the proceeding lines:
- Curve
- Uniswap
- 1 Inch
- DYDX
- Pancake Swape
These popular decentralized exchanges have some unique features, which will be discussed in the blog with all details.
Uniswap
It is one of the most popular decentralized exchanges. Investors can use Uniswap to trade, buy and sell Ethereum blockchain tokens, ERC-20.
To use Uniswap, a user must attach the Ethereum wallet. After that, you can use the cryptocurrencies for trading purposes. To generate eyelids, all you must do is add more and more cryptocurrency to the liquidity pool of Uniswap. Due to the popularity of Uniswap, the company provides ample liquidity for trading purposes. Additionally, this application is user-friendly.
Curve
It is regarded as the best application for the stablecoin. It is regarded as one of the decentralized exchanges designed to offer a swapping facility to the users while using stablecoins with the same value. The design of this application provides ample help in protecting liquidity while mitigating the temporary loss.
This decentralized exchange is regarded as one of the most trusted and safest cryptocurrency applications. Many investors chose Curve for having low risk in the stablecoin staking rewards.
1INCH
It is regarded as the best application for the low-price ranges. Among this list of decentralized exchanges, it is regarded as the best-decentralized exchange aggregator. This DEX offers the research process of various DEXs on the blockchain of Ethereum for finding the best prices and the lowest fee for trading purposes.
1Inch allows investors to trade, buy, and selling of ERC-20 tokens. This also allows purchasing credit and debit cards with an application called Moon Pay.
Pancake swap
It is regarded as one of the best smart chains for Binance. It is a decentralized exchange rooted in the BSC (Binance blockchain). This platform will get its foundations in 2020. At its inauguration, the decentralized exchanges were gradually defamed for the slow rate of transactions. Ethereum-based blockchains were offering slow transactions and high gas fees.
The liquidity of pancake swap is in billions. The UI of this platform is quite straightforward, allowing users to trade, buy and sell through the decentralized exchange with the assets having BSC. This platform gets its roots from BSC; the investors and users of this platform pay really low gas fees.
DYDX Swap
This is the best platform for derivative trading. This platform offers perpetual trading, lending, borrowing, and margin trading. This kind of transactional offer is unavailable on other competitive platforms, which makes it one of the most competitive competitors among all decentralized exchanges. Due to this feature, investors are willing to take more risks.
Additionally, this platform partners with Stark ware, a layer 2 scaling solution of Ethereum. Due to this partnership, this blockchain’s gas fee is quite low.