Decentralization is one of the core principles of cryptocurrency. Cryptocurrency transactions are carried out without high transaction fees and without the need for approval or supervision from banks or other financial institutions, which is one of the most important aspects of investing in cryptocurrencies.
A decentralized exchange, DEX for short, is a peer-to-peer exchange where transactions take place directly between cryptocurrency investors without the need for third parties.
Decentralized exchanges are an important part of the growing decentralized finance (DeFi) ecosystem. Ethereum-based DEXs have gained popularity along with DeFi. Popular projects running on the Ethereum blockchain such as Uniswap and SushiSwap are examples of DEX.
How Does a DEX Work?
On a centralized exchange, you start by creating an account and go through KYC procedures. On a decentralized exchange, on the other hand, you can start making transactions right after making a deposit or connecting your existing crypto wallet. You can buy, sell, or exchange cryptocurrencies. Trading on DEXs takes place via smart contracts and on-chain transactions.
A decentralized exchange sends the current prices to the user and if the user approves, the transaction is completed. A DEX does not ask you to create an account, sign in, or provide your name or e-mail address. Users trade through a liquidity pool. In a liquidity pool, users who want to trade are not matched to a single seller thanks to Automated Market Makers (AMMs).
An AMM refers to a system in which users are involved by lending to liquidity pools. Users can stake their crypto assets for a certain period of time. At the end of the period, the amount of cryptocurrency deposited and part of the transaction fees generated will be refunded. Thanks to Blockchain Technology, transactions are performed much faster and at a low cost. You can have access to more investment vehicles and products and trade by evaluating a wider range of options.
According to research conducted by Messari, $122B worth of transactions were made on decentralized exchanges during the record-breaking April 2021 bull market. In April 2020, the total amount was $1B. DEX Metrics analysts have reported that as of July 2021, approximately $15B worth of transactions were made every week on decentralized exchanges such as Uniswap and PancakeSwap.
DEX Volume Chart, Source: The Block
Advantages of Decentralized Exchanges
The common goals of decentralized exchanges have been to store and diversify digital assets, as well as offer low transaction fees and benefits, and ensure investor privacy.
Variety
Decentralized exchanges offer a wide range of assets and ways to benefit from them.
Storage
DEXs do not have direct storage, but users can connect their external wallets and make transactions thanks to smart contracts.
Trustless Transactions
Opposite of a CEX, a DEX allows users to make decentralized transactions through smart contracts. All transactions executed on a DEX are recorded on a blockchain. A DEX does not host users' crypto assets, so it is less likely to be attacked by hackers.
Low Fees
Decentralized exchanges operate by leveraging smart contract technology. Fees on decentralized exchanges are like gas fees on the Ethereum blockchain. Fees vary depending on network usage.
Privacy
In DEX, users don't need to share their confidential information, such as Private Keys. As we mentioned earlier, this is because users can trade directly from their wallets on a DEX. Users do not need to go through KYC or AML processes, which provides ease of use, but leads to a lack of legal procedures on DEXs.
Cryptocurrencies of Decentralized Exchanges Listed on Bitexen are as follows:
Uniswap (UNI)
Uniswap, one of the first AMMs, allows users to become liquidity providers. Investors add their assets to liquidity pools. Liquidity providers can then earn passive income by taking their share of the fees accumulated in the pools.
PancakeSwap (CAKE)
PancakeSwap is a DEX that runs on the Binance Smart Chain (BSC) blockchain on the principle of AMM, where users can transact with various cryptocurrencies in the BEP-20 standard and earn passive income by providing liquidity to the protocol. PancakeSwap is currently one of the most popular trading platforms on the BNB Chain and its daily trading volume is more than $300M.
Curve (CRV)
Curve is a DEX established specifically for trading stablecoins. The purpose of this protocol running on the Ethereum blockchain is to make stablecoin trading efficient by minimizing slippage and transaction fees. Curve launched on Ethereum in 2017, and has since been integrated into many popular blockchains and second layer services such as Avalanche, Polygon, and Fantom.
