Decentralized exchanges of DEXs, as they're commonly called, are getting increasingly popular by the day. In this article, we will try to understand more about them and discuss the top 5 decentralized exchanges by volume in detail. So let's start without wasting any more time.
What Are Decentralised Exchanges?
A decentralized exchange (or DEX) is a peer-to-peer marketplace that allows users to trade cryptocurrencies without using an intermediary to facilitate the transfer and custody of funds. DEXs substitute intermediaries like banks, brokers, payment processors, etc., withblockchain-based smart contracts to facilitate the exchange of assets.
The main USP or Unique Selling Point of DEXs is complete transparency. They ensure the completely transparent movement of funds and the mechanisms to facilitate the exchange. Furthermore, because user funds are not routed through a third party's cryptocurrency wallet during trading, DEXs reduce counterparty risk and can potentially reduce systemic centralization risks in the cryptocurrency ecosystem. In simple words, Decentralised exchanges or DEXs enable users to buy and sell cryptocurrencies with one another without any brokers.
How Do Decentralised Exchanges Work?
The functioning of decentralized exchanges is very different from that of centralized exchanges or CEXs. They operate without intermediary organizations or brokers to clear transactions and maintain records. They instead use self-executing smart contracts to facilitate the trade. This dynamic enables users to buy/sell crypto at a lower cost or brokerage than centralized crypto exchanges. One must also note that there are generations of decentralized crypto exchanges and DeFi products, from order books to swaps. These order book exchanges work like any centralized exchange by compiling a record of all open buy and sell orders for a particular asset. The spread between these prices determines the depth of the order book and the prevailing market price. However, the newer and more advanced DEXs use liquidity pool protocols to determine asset pricing. These peer-to-peer exchanges instantly execute trades between users' wallets — a process is known as a swap by some. Total value locked (TVL), or the value of assets held in the protocol's smart contracts, is used to rank the DEXs in this category. Now that all the basics are covered, let's discuss the top 5 decentralized exchanges worldwide.
Top 5 Decentralised Exchanges
Here are the top 5 decentralized exchanges by trading volume:
Uniswap is a new generation protocol that allows traders to swap their Ethereum for other ERC20 tokens or vice versa. These are peer-to-peer transactions that happen without an order book. Instead, the swap rate is decided by the demand and supply equation of the swap pair. The high liquidity on the platform (for most tokens) ensures minimum slippage while swapping the pair. UniSwap tackles this problem of low liquidity by using Automated market makers or AMMs to control the supply. This helps ensure an easy swap of ERC20 tokens without relying on Liquidity Provider tokens (LPs). According to reports by CoinMarketCap, Uniswap now owns more than 40% of the DEX trading volume and crossed the market cap of $10 Billion. Its top competitors include Sushiswap and Matcha - but note that these are not built on Ethereum.
Sushiswap or SUSHI is a decentralized exchange (or DEX) built on the Ethereum network. It is one of the top competitors of UNISWAP V3. Just like Uniswap V3, it also uses smart contracts to create liquidity pools that allow users to trade crypto assets directly with no intermediaries. However, Sushiswap allows users to become liquidity pool providers and support the ecosystem for rewards. This can be done by sending equal-value amounts of two cryptocurrencies to SushiSwap. In exchange, they receive rewards from Liquidity Providers or LP tokens. Users can deposit their newly created LP tokens into yield farms to earn further APY rewards. This helps create an extra incentive for users to continue to be part of the pool over time.
Curve finance is a decentralized exchange with a primary focus on efficient, Stable Coin Trading. Like the other DEXs on this list, curve finance also has AMMs or Automatic Market Makers to maintain low fees and avoid massive slippage. However, unlike Uniswap or Sushiswap, it focuses only on stable assets or stable coins. As a result, the curve also offers a large variety of stable coins, including DAI, USDT, USDC, BUSD, and TUSD. The fee on all the pools is around 0.04%, of which half goes to the liquidity providers and the other half to the members of the DAO.
PancakeSwap is a decentralized exchange based on the Binance or BNB Chain. PancakeSwap focuses mainly on BEP20 tokens – a specific token standard developed by Binance. BEP20 is nothing but a token standard for tokens on the Binance chain; it allows developers to deploy fungible digital currencies or tokens on Binance Smart Chain. It is much cheaper and faster than other DEXs as it runs on BSC (Binance Chain). It also offers its users yield farming, lotteries, and initial farm offerings.
1INCH is an exchange aggregator that aggregates token prices across various decentralized exchanges to find the best prices for users and re-routes trades between them. It uses a massive pool of liquidity sources with over 50 sources on Ethereum and 20/8 for Binance Smart Chain and Polygon, respectively. 1inch's algorithm finds the cheapest ways to place a trade using different exchanges and liquidity protocols. It is done by swapping your initial cryptocurrency for various across several different protocols for several different currencies before it arrives at the final swap. The benefit of doing so is that you may be able to purchase Wrapped Bitcoin at a lower cost.
This article has discussed a lot about DEX or decentralized exchanges. We also talked, discussed, and tried to learn about some prominent players in the sector. As you may have noticed, every DEX has a USP and offers a unique set of features. It is now entirely up to you to decide based on your requirement. You can do this by comparing the following factors for any DEX: