Our DeFi experts demystify and explain decentralized finance, how it works, and how to capitalize on its growth potential.
DEXs (Decentralized Exchanges)
ShapeShift: Convenient DEX Aggregation Platform
Established in 2014, ShapeShift is a cryptocurrency exchange that has been growing in popularity over the last couple of years. The platform allows users to buy, sell, and trade a variety of cryptocurrencies like BTC, ETH, and BNB, in addition to stablecoins like USDT and USDC. However, ShapeShift has evolved to become much more than just an exchange since its inception. Now, it's a full-scale DeFi platform that also acts as a decentralized exchange (DEX) aggregator and a portfolio management tool. ShapeShift has successfully partnered with many protocols, allowing it to put together the features of many DEXs and offer their trading pairs. Now, let's dive deeper into what features the platform offers and why it has become so popular. What Features Does ShapeShift Offer? Some of ShapeShift's key features are as follows: Liquidity Providing and Staking These two features are core pillars of DeFi, and thanks to them, anyone can earn a solid passive income as long as they have some crypto. ShapeShift allows users to earn revenue through its liquidity provider program. Investors can stake their assets on the platform in exchange for a share of the trading fees. As you can already guess, users who provide liquidity earn rewards in the form of FOX, the platform's native token. Multi-DEX Support One of the things that makes ShapeShift unique is that it supports multiple DEXs simultaneously. This means that users can trade on many different exchanges through the platform without having to create accounts on each one. This isn't just a convenient solution—it can also be a great earning opportunity. For example, if the price of an asset is different on two platforms, you can use ShapeShift to perform arbitrage and earn money on the price difference. Instant Swap ShapeShift also offers an instant swap feature, which allows users to trade one cryptocurrency for another without having to wait for an order to be filled. Namely, ShapeShift has partnered with 0x and THORChain, implementing a cross-chain swapping protocol between cryptos. If you want to buy ETH with BTC without a cross-chain solution, for example, you'd have to sell your ETH for USD and then fill an order for your new BTC purchase. However, with ShapeShift, you can directly swap your ETH for BTC, thanks to the cross-chain protocol. How Does ShapeShift Work? Although ShapeShift started as a centralized exchange, it became a decentralized protocol run by a decentralized autonomous organization (DAO). This means that the holders of the protocol's native token (FOX) get to vote on how the project is run and how its future will unfold. Every token is worth exactly one vote, so the more tokens you have, the more impactful you can be on the protocol. In terms of the actual platform, ShapeShift is pretty straightforward to use. After connecting your wallet, you can start buying, selling, and trading cryptocurrencies immediately. You'll also have instant access to all the DeFi features, like lending, borrowing, and staking. In addition to being available through a website, the platform also has a mobile app for both Android and iOS devices. The FOX Token The FOX token is built on the Ethereum blockchain, meaning it's an ERC-20 token. We briefly mentioned that the token is primarily used for governance on the protocol, but it also has a utility use case. Namely, the FOX token can be used to perform DeFi operations like trading, staking, and yield farming on the platform. Currently, as of September 2022, the FOX token trades at $0.06, with an all-time high of $1.67 reached in April 2021. So, if the token somehow manages to reach its all-time high, there's a potential to earn a 2,600% profit with just one position. Final Thoughts All in all, ShapeShift ended up being quite a promising project, despite changing from a centralized exchange (CEX) to a DeFi platform. As a platform, ShapeShift simply offers too many features to be ignored—it's a DEX where you can buy and sell crypto, as well as a platform for DeFi operations like staking, lending, and borrowing. However, it's worth mentioning that ShapeShift had a small incident in the past. Namely, the platform had a massive security breach in its first couple of years, causing users to lose around $200,000 due to the attack. Nevertheless, the platform has come a long way since then, and in the last six years, they've operating impeccably.
DEXs (Decentralized Exchanges)
Orca: A Solana-Based AMM DEX for the People
Decentralized exchanges (DEXs) have flooded the market in the last few years. Unlike centralized exchanges (CEXs), which have a central authority leading them (usually in the form of a company), decentralized exchanges are fully autonomous protocols built on top of the blockchain. This means that no central body has any view over your activity, guaranteeing complete privacy for all its users. What Is Orca? One of the most user-friendly decentralized exchanges is Orca, a protocol built on Solana's blockchain. Although the protocol is not as popular as other DEXs, Orca can still be regarded as a great project. Orca's primary focus is to provide a permissionless experience to all its users when buying and selling crypto. To do this, they have built a unique Automated Market Maker (AMM) system that does not require any order books or liquidity pools. As a result, all positions opened on Orca are entirely decentralized. Now with the basics out of the way, let's dive deeper into how Orca works as a protocol. How Does Orca Work? Orca works as a decentralized protocol that is built on top of the Solana blockchain. The mainnet for Orca was launched in March 2020. We briefly mentioned that Orca uses an Automated Market Maker (AMM), but how exactly does that work? Users who want to buy or sell crypto on Orca will have to deposit their crypto into the Orca smart contract. After the user has deposited their crypto, they will be able to trade on the Orca platform. When a trade is initiated, the Orca protocol automatically matches the trade with another user who wants to buy or sell the same asset. This means that as long as there's a market for the cryptocurrency in question, your order is almost guaranteed to execute. It's also worth mentioning that the team behind Orca has built a native token for their protocol, which goes under the label ORCA. The main use case for the ORCA token is to provide liquidity to the platform. When a user provides liquidity to the Orca platform, they will receive staking rewards. The rewards coming in the form of the ORCA token can then be used to trade on the Orca platform, or they can be sold on other exchanges. How Does Orca Compete With Other DEXs? Of course, Orca isn't the only DEX to use such a system. Its protocol for buying and selling crypto is very similar to how other AMM DEXs work, such as Uniswap. The main difference between Orca and other AMM DEXs is that Orca uses the Solana blockchain instead of Ethereum. Consequently, trades on Orca are much faster and cheaper than they would be on other protocols since Solana's fees are significantly lower than Ethereum's. What Benefits Does Orca Offer? Focus on User Experience The team behind Orca has made it their mission to provide a seamless and permissionless experience for all their users. This means anyone can use the Orca protocol without going through a KYC process. Focus on Security The Orca protocol is built on top of the Solana blockchain, which is known for prioritizing scalability and security. In addition, the Orca team has also built a number of security features into their protocol, such as 2-factor authentication and multisig wallets. Focus on Flexibility The Orca protocol is designed to be easily integrated into other platforms and protocols. This allows developers to easily build on the Orca protocol and create new applications and services. Should I Invest in the Orca Protocol? If you want to invest in a decentralized exchange primarily focused on user experience and security, then Orca is an excellent option for you. There is a vast use case for the ORCA token, as anyone can use it to transact. Moreover, stakers can provide liquidity to the protocol and receive their rewards in ORCA tokens, so the future for it seems bright. Still, it is essential to note that Orca is a relatively new project and is not yet available on any major exchanges. It may be difficult to buy ORCA tokens if you are not already familiar with the cryptocurrency space. Promising Project for the People Overall, Orca seems to be a promising project. It's a fully decentralized protocol built on the Solana blockchain, meaning that all of the transactions executed on the platform will have minimal fees and lightning-fast execution. However, the Orca platform has some drawbacks too. It's a relatively new project, and although Solana is known for being fast and efficient with transactions, it's also known to have occasional network outages. Make sure to do your own research to see whether or not Orca is the right investment for you.
DEXs (Decentralized Exchanges)
Pangolin: Avalanche's Innovative Cross-Chain DEX
As of late 2022, decentralized finance (DeFi) is growing at a rapid pace. More DeFi applications are being released, each one offering new and unique features. Blockchain users are attracted to this, so it's apparent why DeFi is growing accordingly. However, there's one inherent problem. The majority of DeFi apps are built on top of Ethereum, which has a notorious gas fee problem. Many teams of developers have been discouraged to build an app on Ethereum simply because the gas fees of the ecosystem would make their project unsustainable. So, developers have started to build their apps on other blockchains—which is where networks like Avalanche came onto the scene. What Is Avalanche? Originally launched in September 2020, Avalanche promised to offer the same features as Ethereum—smart contracts, decentralized apps (Dapp), and automated protocols—only operating on the network would be faster, cheaper, and ultimately more scalable than on Ethereum. Also keep in mind that, unlike Ethereum, Avalanche is a cross-chain protocol. This means it's designed to interact directly with other blockchains and exchange data with them. For example, you could use Avalanche to launch an ERC20 token on the Ethereum network. Then, you could use the Avalanche network to trade that same token with other ERC20 tokens or even Bitcoin. However, with the current way DeFi is built, you would have a difficult time trading your token for another. You would have to use "bridges" to make the transaction possible. However, bridges have occasional security flows and are known to delay transactions, which is why a cross-chain blockchain will do the job with ease. Pangolin: An Avalanche-Based DEX with a Cross-Chain Vision One of the most popular DeFi applications built on the Avalanche blockchain is Pangolin. Pangolin is a decentralized exchange (DEX) that enables users to trade cryptocurrency assets in a secure manner without having any third party oversee them. In other words, you don't have to worry about entrusting your funds to any single entity or centralized exchange like Binance or Coinbase. Pangolin's Features Perhaps the most attractive feature about Pangolin is that it's a cross-chain DEX. This means that you can trade assets from different blockchains on the same platform. For example, you could trade a token on Ethereum's network (ERC20) for Bitcoin all within the same DEX. Moreover, Pangolin is also one of the most user-friendly DEXs on the market. Once you visit its website, you'll notice that it has a clean and intuitive interface that even beginners will have an easy time navigating. All you need to do is connect your wallet to the platform, which can be done via platforms such as MetaMask, Ledger, and Trezor. Drawbacks of the Pangolin DEX So far, we've only talked about the advantages of using Pangolin. However, no DEX is perfect and there are a few drawbacks worth mentioning. Firstly, Pangolin is still a young project that's in its early stages of development as it was only launched in February 2021. This means that there's still a lot of room for improvement and that some features are still missing. For example, the platform doesn't currently support stop-loss orders or limit orders. This means that you can only trade assets at the current market price, which isn't ideal for everyone. Another thing worth mentioning is that Pangolin is primarily focused on trading Bitcoin and Ethereum assets. This might change in the future, but for now, you might have a hard time finding some lesser-known altcoins that you're looking for. Finally, Pangolin currently doesn't have that much trading volume. This is to be expected given that the platform is still relatively new. However, it's something worth considering if you're looking for a DEX with high liquidity. Should I Invest In Pangolin? Pangolin has its native token going under the symbol PNG, with a current market cap of around $8 million and a price per token of $0.06. The token is primarily used in the blockchain's governance model, allowing the community to shape the way the protocol is developing. We believe that Pangolin is a solid investment, as the token is 100% community-focused, with no institutional investors having a part of the circulating supply. Still, keep in mind that Pangolin is a relatively new project, and it might need some time to prove its authenticity to the public. Thankfully, the project hasn't had any security issues thus far, and it has successfully delivered in all departments. Nevertheless, only time will tell what the future holds for Pangolin as a project.
DEXs (Decentralized Exchanges)
How to Create a Cryptocurrency Exchange
DEXs (Decentralized Exchanges)
Everything There Is to Know About Decentralized Stock Exchanges
What Is a Decentralized Stock Exchange? A decentralized stock exchange or decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that facilitates direct trades between market participants. They accomplish one of crypto's primary missions: enabling financial transactions without intermediaries. Uniswap and Sushiswap are the biggest decentralized stock exchanges by transaction volume built on the Ethereum blockchain. They are part of the budding collection of decentralized finance (DeFi) tools, consisting of a wide range of financial services and products accessible with a digital wallet. Trading comes with its fair share of risks, but traders should not encounter additional risks other than those they are willing to handle. Typically, decentralized stock exchanges don't provide custody of users' funds. Instead, traders directly keep their digital assets in their digital wallets all the time. Are Decentralized Stock Exchanges Legal? The legality of decentralized stock exchanges is uncertain as digital assets themselves. For example, some DEXs are illegal in the State of New York in the U.S. Besides, popular DEXs are increasingly under scrutiny by regulators for compliance, transparency, and other customer relations issues. In some instances, decentralized stock exchanges are the only avenues of obtaining digital currencies that are not listed on government-regulated marketplaces, like Monero and Dash. Furthermore, DEXs allow investors to stake their assets in liquidity pools to generate rewards. However, there is a risk of using decentralized stock exchanges—users don't enjoy the same protections offered by centralized exchanges (CEXs). This is why most stock traders still prefer CEXs over DEXs. How Does a Decentralized Stock Exchange Work? DEXs differ from CEXs by leveraging the full functionalities of blockchain technology, especially smart contracts and decentralized governance models. In a DEX, users enjoy custody of their assets in the protocols or blockchain networks. You need to consider the various types of DEXs to understand better how decentralized stock exchanges work. Let's briefly have a look at each of them: Automated Market Maker DEXs The first noteworthy type of DEXs is the one that applies the automated market maker (AMM) model. The approach uses smart contracts to resolve the liquidity issue plaguing cryptocurrency exchanges. AMM relies on blockchain oracles to access data from other marketplaces and establish the fair prices of assets. When you take a closer look, AMMs present a significant deviation from how DEXs work with matching buy and sale orders. Contrary, DEX protocols rely on pre-funded asset pools, known as liquidity pools. Two examples of DEXs from this category include the following: 1inch Exchange It aggregates liquidity from various DEXs to reduce slippage on big orders. In the stock market, slippage is a product of inadequate liquidity in one marketplace, making a buyer incur more on an asset than was expected. 1inch minimizes slippage and allows traders to discover the best market prices for assets. DiversiFi It aggregates liquidity from DEXs and CEXs to offer the best liquidity. Besides, it applies StarkWare's batching technique to enable almost 10,000 trades per second. Liquidity Pool DEXs Liquidity pools in AMM-based DEXs comprise two digital assets in a trading pair. Liquidity providers (LPs) deposit assets in a 1:1 ratio into a DEX's liquidity pool. They receive a certain percentage of transaction fees for every trade performed on the pair. In addition, LPs lock an equal amount of the assets in a trading pair to earn interest via liquidity mining. Liquidity pools play a major role in how DEXs work as they allow users to perform trades and earn interest in a permissionless, trustless and transparent way. You can compare them to the vast cash reserves banks use to provide financial services to customers. With liquidity pools, traders don't have to wait for an imaginary buyer or seller to match their transaction requests. Two examples of DEXs from this category include the following: Uniswap It allows traders to swap a pair of listed assets through liquidity pools. The pools ensure Uniswap remains permissionless and trustless, further democratizing financial products and services.Curve Like Uniswap, Curve is a liquidity pool decentralized stock exchange, but Curve categorically deals with stablecoin trading, facilitating trades with minimal slippage and fees. The other examples of liquidity pool DEXs include SushiSwap, DODO, Balancer, Bancor, and Gnosis. Order Book DEXs Still, on waiting for an imaginary buyer or seller, order book decentralized stock exchanges present another approach to how DEXs work. Order books enable document compilations of all open buy and sell orders. In order book DEXs, the difference between the buy and sell orders is essential in finding the order book depth. Consequently, the order book depth helps establish the market price of assets in a marketplace. dYdX It enables users to use derivative products in a decentralized way. The platform also offers P2P borrowing, meaning users can generate passive income by holding assets on the dYdX protocol.DDEX It enables decentralized margin trading. In other words, it allows users to borrow assets and increase their potential yields. Other order book DEXs include Binance DEX, Looprint Exchange, ViteX, Tomo DEX, and Nash Exchange. Advantages of Decentralized Stock Exchanges A broad basket of assets If you are looking for newly listed tokens with high potential, DEXs have you sorted. They have a nearly endless basket of assets—from popular to little-known tokens.Heightened security They are tentatively impossible to hack since DEX users self-custody their assets.Anonymity Users do not need to sign up or submit personal information to use DEXs.Unlimited access Unlike CEXs that are restricted by local laws, DEXs are borderless. Anyone from any part of the world can access them by connecting their digital wallets. Disadvantages of DEXs Complex user interfaces DEX users require extensive knowledge as the interfaces are complex. To make matters worse, DEXs lack customer support to guide users accordingly.Smart contract vulnerability DEX platforms are as secure as their underlying smart contracts. They may contain bugs that hackers can exploit to access user wallets.Riskier tokens Since DEXs list coins without vetting them, most of the listed tokens are riskier than those listed in CEXs. Decentralized Stock Exchanges–Bottom Line While CEXs are more popular than DEXs, some market participants dislike their bells and whistles. Satoshi Nakamoto's original vision was to decentralize traditional finance completely, and decentralized stock exchanges align well with this vision as they eliminate third parties and significantly minimize fees. As DEXs are built on smart contracts, expect more revolutionary use cases in the future.
DEXs (Decentralized Exchanges)
Buying Crypto on a Decentralized Exchange
Unlike centralized order book models, decentralized exchanges (DEXs) allow users to connect to the blockchain and trade cryptocurrencies directly. These exchanges work without a central authority and instead use a smart contract that contains the underlying logic and codes that defines the exchange’s functions and possibilities. Decentralized exchanges were developed to solve centralized exchange problems such as privacy, speed, and censorship. Traditional order books are slow, and using exchanges powered by order books requires users to provide personal information, which defeats the objective of decentralization. On DEXs, all that is needed is a wallet compatible with the blockchain where they exist, and you can transact as you wish 24/7. DEXs are faster, trustless, and less expensive than centralized exchanges. The shortcoming of decentralized exchanges is that they only support the exchange of cryptocurrencies for other cryptocurrencies or stablecoins. The crypto you exchange must be on the same blockchain. Although recent iterations and bridges make moving tokens across blockchains simple, you still incur transaction fees along with the cost of actual transactions. DEXs also require you to connect your wallet to the internet, and the prices of tokens on DEXs can be volatile. Hackers can exploit the code if there are mistakes in the smart contract. Therefore, it is advisable to research the exchange properly and ensure that it has been audited and used by others in the community before using it for transactions. Is It Possible to Buy Crypto on a Decentralized Exchange? Getting started with a DEX is simple. Add the needed wallet to your browser and add funds, preferably from a centralized exchange. Even though you have fiat currencies, you must do this because it is impossible to use them on decentralized exchanges. Fiat can be easily converted to your preferred cryptocurrency using the peer-to-peer section of most centralized exchanges. Most decentralized exchanges support the native blockchain token, which you can swap for other tokens on the same exchange. After that, you can move funds to the asset of your choice or explore the range of options and activities available on these exchanges. Some decentralized exchanges offer derivatives like futures, perpetual swaps, and options trading. You may also want to try out other features of decentralized exchanges, such as yield farming and staking, which can be lucrative but risky. Note that you cannot store your cryptocurrency on a DEX. It is easier to buy crypto from decentralized exchanges when you already have the cryptocurrencies. Alternatively, you can move your cryptocurrency to a decentralized exchange so that you can quickly make transactions whenever the need arises. Wallets on a browser extension used to transact on decentralized exchanges are not the safest bet for securely storing your crypto. Consider getting a hardware wallet to do this without fear of hack and losses. The Best Decentralized Crypto Exchange Decentralized exchanges have advanced and are more efficient on the user side. DEXs are the most popular dApps on most blockchains, and they help provide users with the liquidity they need through liquidity pools. We will categorize the best exchanges based on popularity on their respective blockchains, total value locked, and other crucial factors that make them stand out. Uniswap Ethereum-based Uniswap was the decentralized exchange that brought DeFi to the limelight. It achieved a level of popularity and trading volume higher than some of the most well-known centralized platforms. Uniswap allows users to become liquidity providers by contributing their assets to decentralized liquidity pools and earning a fraction of the fees generated on the platform. Unswap has since implemented several upgrades to the protocol that include improvements in reward mechanisms based on user participation and contribution to the platform. Unswap is practically a DAO at the moment, sponsoring the brightest ideas in the DeFi space. It rewarded its users with an airdrop of 400 UNI each in 2020, worth over $16,000 at its peak. PancakeSwap PancakeSwap is the most popular decentralized exchange on Binance Smart Chain (BSC). The trading volume on this exchange has hit $300-400 million on multiple occasions. The PancakeSwap team bootstrapped the project, although the exchange is now maintained with funds from the PancakeSwap treasury. The treasury is a pool of funds earned through the initial 12% of all fees allocated to the protocol. It supports thousands of BSC tokens and a native token, Cake. PancakeSwap is often targeted by DeFi traders seeking new alpha in crypto. The exchange offers a range of assets like NFTs and yield farming in multiple tokens. Curve Curve is a decentralized swap solution on Ethereum that allows users to trade stablecoins and other crypto assets with an almost negligible fee of 0.04%. Half of the amount paid in fees goes to liquidity providers, and the other half goes to Curve token stakers. The project uses mathematically efficient bonding curves to enable users to swap assets with minimal slippage. Curve has now expanded to several blockchains and has a total value of $9 billion. SushiSwap SushiSwap is a modified fork of the Uniswap protocol. It allows traders to swap assets across multiple blockchains and layer two platforms. SushiSwap was one of the first decentralized exchanges to support the Avalanche, Stellar, Harmony, and Cello blockchain. It is especially popular as one of the first DEX to deploy on new chains. SushiSwap allows users to add liquidity to the platform to earn fees. It also supports various features such as yield pools and on-chain lending solutions. It has a utility token known as Sushi, which can be staked on the exchange to earn a fraction of the trading fees. How to Pay for Your Crypto You can buy crypto on decentralized exchanges through the peer-to-peer or centralized exchange of your cash for cryptocurrencies. As soon as you pay the seller, the exchange will release your crypto, and you can transfer it over to decentralized exchanges. How to Buy Crypto on a Decentralized Exchange To buy crypto on a decentralized exchange, follow these simple steps: Buy the cryptocurrency compatible with the blockchain for that decentralized exchange on a centralized exchange like Binance. Next, download a Web 3.0 wallet compatible with the blockchain you want to move your funds to.Create a username and password and save the passphrase, which can be 12 words. Save your wallet's private key so you don’t lose access to your funds.Copy the address from the opened wallet. Ensure that this address is what shows when you click "Deposit."Go back to the exchange and click on "Send cryptocurrency." A dropdown will ask you to select your preferred token and chain. Paste the wallet address you just copied in the recipient form on the exchange. Now, click the send button and confirm after rechecking the address.Swap the token to your preferred asset on the exchange and explore other options on the DEX.
DEXs (Decentralized Exchanges)
DEX vs. CEX: Which Is Better?
What is DEX, and How Does it Work? A decentralized exchange (DEX) is a peer-to-peer crypto marketplace where transactions occur directly between traders. The primary function of a DEX is to foster permissionless DeFi transactions between buyers and sellers without the influence of intermediaries. By trading on a decentralized exchange, users avoid mediator hassles since entities like banks, brokers, and payment processors have no power to regulate or control transactions within the system. How do DEXs work? DEXs are blockchain-powered applications that facilitate large-scale crypto-to-crypto transactions. Unlike centralized exchanges, DEXs do not allow the trading of fiat for crypto; rather, crypto token holders trade tokens exclusively with other token holders. DEXs are run and powered by smart contracts and do not need intermediaries to help complete trades. Everything is automated, provided the required conditions are met. DEXs may rely on liquidity pools and smart contracts to power trading on the platform. These liquidity pools contain a basket of locked tokens provided by the users of the DEX, who earn a reward for their liquidity provision. Interested traders simply exchange their cryptocurrencies for the desired tokens available within the pool. What is CEX? A centralized exchange (CEX) is a crypto exchange marketplace that facilitates the trading of cryptocurrencies in a centralized manner. They are one of the most popular cryptocurrency exchange operations widely available to traders globally. Its accessibility and the swift nature of transactions amongst day traders and crypto investors make the centralized exchange the go-to exchange for any beginner trader. Also, the fact that they allow buying and selling of crypto via fiat gives CEXs an edge over their decentralized counterparts. How do CEXs work? Centralized exchanges let users trade with each other by keeping an order book - a list of traders' buy and sell orders. When a trader deposits funds on a centralized exchange of their choice, the CEX assumes custody of the deposited assets (usually fiat) and issues a comparable quantity of IOU (an informal document that acknowledges a debt one party owes to another) to the trader. After this, CEX conveniently tracks each user's IOUs as they are traded and only turns them into actual cash at the time of withdrawal. Although CEX has grown in popularity over the years, the platform has faced numerous challenges, including a lack of transparency, an overreliance on KYC procedures (Know Your Customer), a destination point for potential attackers (hackers), and a tool for government censorship. The Key Differences Between DEX and CEX Custodial vs. Non-Custodial: One of the main differences between DEX and CEX is that DEX appreciates the need for users to hold on to their crypto assets as sole custodians. By doing this, users have exclusive control of overall assets. CEX requires that users place assets in their custody before trading. While the DEX approach appears to have merit, it may come with some risks, such as losing control (passwords/log-in keys) over assets.Regulations: Most DEXs are open to everyone. They don't force their users to undergo KYC procedures or anti-money laundering (AML) standards. This approach provides a layer of anonymity for traders and users of the platform. On the other hand, CEXs rely heavily on regulatory bodies to thrive. Giving out personal information to participate in crypto trading is usually a big turn-off for investors that wish to remain private.Liquidity: Another difference between DEX and CEX is liquidity. While DEX is a new entrant into the financial ecosystem, it has to struggle to grow its liquidity pool by leveraging its users and providing incentives for liquidity provision. This in itself is a significant difference in that CEXs have one of the largest pools of liquidity because they work with bigger investors when compared to DEXs. Is DEX or CEX More Profitable? Crypto exchange profitability rests on several factors, such as ease of navigation, user experience, trading fees, etc. Rookie traders may find that CEXs are simpler to navigate. On the other hand, DEXs are likely to appeal to more seasoned traders who already have a firm grasp of the crypto market and seek better control over their holdings. DEXs provide users with complete control over their assets and some degree of anonymity. When using CEXs, users are not in complete control of their assets, which goes against one of the core ethos of cryptocurrencies: decentralization. DEXs also charge relatively lower trading fees compared to CEXs. Depending on the trade, the trading fees could make a difference between seeing huge profits or minimal gains. Expert traders may decide to combine the two crypto exchange models depending on their goals. For instance, when an individual wishes to engage in active trading or buy and sell transactions, they may use a CEX. After that, they turn to DEXs for long-term asset storage. What Makes DEX Better Than CEX? Most traders tend to lean towards DEX for the following reasons: With DEX, users are assured better security and complete ownership and control of assets.They also encourage the peer-to-peer exchange of cryptocurrencies or liquidity pool-powered trading without middlemen. Decentralized exchanges prevent market manipulation, protecting users from fake trading and wash trading. DEX also does not require customers to fill out know-your-customer (KYC) forms, offering privacy and anonymity to users.
DEXs (Decentralized Exchanges)
Pros and Cons of Decentralized Exchange (DEX)
A DEX, or decentralized exchange, is a peer-to-peer marketplace where crypto traders can make transactions directly. For example, a decentralized platform fosters financial transactions unmanaged by brokers, banks, or any other form of intermediary. Most popular DEXs run on Ethereum, such as SushiSwap and Uniswap. If you’ve ever heard the term DEX blockchain thrown around, it essentially refers to decentralized crypto exchanges being blockchain-based apps. These apps facilitate the large-scale trading of crypto assets between users worldwide. Types of Decentralized Exchanges The DEX field is incredibly vast. However, you should be aware of three primary forms of DEXs: 1. The Automated Market Maker DEX Many more popular DEXs fall into the category of automated market maker (AMM). AMMs are focused on pricing assets using a simple mathematical formula and organizing them into liquidity pools. Automated market makers typically don’t support more complicated orders. However, they serve the purpose of allowing users to add their assets to liquidity pools and earn a share of the fees that trades have generated. Uniswap is an excellent example of an AMM and was one of the first exchanges in the market to deploy an automated market maker protocol. 2. The Order Book-Based DEX Order book-based DEXs can fulfill more complex order types that are not typically possible with AMMs. For example, functions not available with AMMs include limit, take profit, and stop-loss orders. Older order book-based DEXs were slow and inefficient compared to today. As a result, they offered limited and low liquidity, and still do to a degree. In addition, they required traders to deposit tokens into a smart contract-controlled address, ensuring orders would automatically execute. This action made them somewhat centralized. Today, many decentralized order book-based exchanges operate, including dYdX, IDEX, Serum, and Dexalot. Remember that you have to pay and wait three times when purchasing a token from a DEX with an off-chain order books system. However, it’s a single transaction when using an on-chain order books system, which is much quicker. 3. The Hybrid/Alternative Platform DEX While most DEXs classify as either order book-based or AMM platforms, there is an uptick in platforms attempting something entirely different. Platforms such as Polkadex or Serum offer both AMM and order book-based trading features, and the new IDEX v3 platform blends the best of both worlds to create something called “Hybrid Liquidity.” This unique platform aims to address some of the underlying issues with AMM. Advantages of Decentralized Exchanges Decentralized currency, also known as peer-to-peer money or digital currency, refers to banking-free methods of transferring assets or ownership of a commodity without needing a third party to officiate it. Since those intermediaries aren’t necessary, it allows for more transparency between the parties and lowers the transaction costs. DEXs are desirable for enhanced privacy, better security practices, and greater user control. Users also don’t have to worry about counterparty risk since they don't have to transfer their assets to an exchange. As a result, DEXs are famous for reducing the risk of loss and theft of funds due to hackers. They’re also able to prevent price manipulation and fake trading volume, and they can maintain anonymity among users due to a lack of Know Your Customer (KYC) crypto rules and regulations. Disadvantages of Decentralized Exchanges One of the main disadvantages of DEXs is the exact thing that makes them so unique: the lack of central authority. Many believe this can result in regulatory concerns. Here are a few examples of negatives that may come with DEXs: No Recovery Ability The lack of a KYC process or the ability to cancel a transaction complicates things. If an account is compromised or the private key is lost, users are typically unable to recover any lost data or assets. Refunds are not possible. Low Liquidity Traders typically prefer centralized services with larger liquidity pools, currency pairs, and order types. DEX liquidity is inferior compared to centralized exchanges. Since they are relatively new and have low liquidity, they’ll need to attract new users to generate more in the future. Limited Trading Functionality Since DEXs have recently become operable, things are still in the early stages. This means functionality is pretty simple. More advanced features tend to be unavailable on most DEXs. Limited Speeds It takes more time to perform transactions as they need to be checked and validated on a blockchain network, and processing speeds depend on the network’s miners. Many investors aren’t aware of the advantages that DEXs have to offer. They may be wary of security risks, and it may not be user-friendly enough; a handful may not even give them a chance because of low liquidity. Either way, it seems that the adoption of decentralized exchange has been a bit slow. Are Decentralized Exchanges the Future of DeFi? DEXs are a true innovation, allowing users anywhere to trade tokenized assets immediately without a third party. A blockchain or distributed ledger replaces these entities. Decentralized exchange volume surpassed $1 trillion in 2021, and it’s not showing many signs of slowing down either. However, since DEXs are somewhat new, some snags still need to be addressed. However, as time goes on, they have the potential to adopt more complex trading functionalities, become more secure, and grow their liquidity, leading to more users placing their faith in the system.