Cryptocurrency obligates to make money and payments accessible universally. Decentralized Finance, in short DeFi, adds to this obligation and promises access to a globally open alternative to financial services such as savings, loans, trading, insurance, etc.
What is DeFi?
Decentralized Finance or Open Finance is a blockchain-based ecosystem of financial applications that is not dependent on central financial mediators like brokerages, exchanges, or banks to offer monetary contracts between parties and uses smart contracts (computer programs or transaction protocols) on public blockchains. DeFi creates a transparent and permissionless system without any central authority. The biggest advantage of DeFi is that it enables everyone to access financial services especially those who otherwise do not have an approach to financial services because of different reasons such as lack of funds, isolation, political or social oppression, etc. DeFi applications on blockchains develop new financial markets, products, and services. Moreover, DeFi offers fast transfers and reduced fees.
What are Decentralized Applications (DApps)?
Decentralized applications (DApps) are software applications that function on a blockchain network (a spread-out computing system). Unlike traditional apps, DApps’ backend code is hosted on a P2P decentralized network like Ethereum, and not on a centralized server. DApps are applicable to several online industries.
DApps users can:
- Lend or borrow funds
- Go long or go short on various assets
- Trade coins or earn interest directly without any intermediary
DApps Pros and Cons
- Open Source
DApps’ original source code is freely available and can be used, redistributed, verified, copied, and modified
DApps are not controlled by any single authority because they run on blockchain networks.
- Cryptographically Secure
DApps are secured by cryptography. A public blockchain records and holds all the data. It is very expensive and almost impossible to attack the whole network.
- No Subscription
On DApps, there are public and private keys to access data, so there is no need for subscription or registration
- Direct Transactions
Transactions on DApps occur without any help of a third-party financial operator
DEXs function without any central entity, so they do not need any sign-up process and KYC/AML requirements.
- Difficult to Build
It is very difficult to build DApps because they need complex protocols to get agreements
- Difficult to Update
As building DApps is difficult, the same is the case with their updating. Updating and fixing bugs on DApps is very complex and arduous.
- User Identity
Users’ identities cannot be verified because DApps have no central authority.
The popularity of Decentralized Exchanges (DEXs) is increasing with the blazing hype of DeFi products. Although the majority of crypto exchanges are still centralized, it is said that the future of crypto exchanges is fastened to DEXs.
What is a Decentralized Exchange (DEX)?
In simple words, a decentralized exchange is a P2P non-custodial marketplace to connect digital currency buyers and sellers. It is non-custodial in the sense that there is no central authority to keep the digital asses safe. The users control their transactions on an automated ‘trustless’ system. On DEXs, all trading occurs by interacting with smart contracts.
Difference Between Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs)
CEX – Platform controls
DEX – Users control
CEX – Orders execution in milliseconds
DEX – Orders execution takes place in minute(s)
CEX – Security perils like hacking
DEX – Free from security risks
CEX – High
DEX – Low
CEX – Highly popular
DEX – Not much popular
CEX – Easy to regulate and requires license
DEX – Difficult to regulate and does not require a license
CEX – Charges fee
DEX – Zero or minimum fee
How DEXs Work
Decentralized Exchanges work in the following ways.
- On-Chain Order Books
On-chain transactions occur on the DEXs that use on-chain order books. On-chain order books are blockchain transactions. These transactions require an overall update of the blockchain networks. The time to perform transactions depends on blockchain network congestion. It takes longer if the volume of transactions is huge.
- Off-Chain Order Books
DEXs using off-chain order books differ from on-chain order books DEXs. Off-chain transactions happen outside the blockchain. The record is hosted in a centralized entity. These DEXs are semi-decentralized in their nature, and they use ‘relayers’ to manage off-chain order books.
- Automated Market Makers (AMM)
Automated market makers impart liquidity to the exchange. The AMM-based DEXs use liquidity pools instead of order books. AMMs got immense fame in 2020 and are used by popular DEX platforms.
Top 5 DeFi Exchanges
Uniswap is an automated decentralized finance protocol to create liquidity and exchange cryptocurrencies. This open-source software is licensed under GPL and is powered by a constant product formula (x*y = k). Uniswap protocol is used to trade ERC -20 tokens on the Ethereum blockchain fast and efficiently. The Uniswap protocol enables developers, liquidity providers, and traders to take part in an open and accessible financial marketplace. It was created by a former mechanical engineer at Siemens in 2018. In October 2020, Uniswap was declared the largest decentralized exchange and the fourth-largest cryptocurrency exchange by daily trading volume.
In order to use Uniswap, the users need to have an Ethereum wallet and some ETH. Then users can swap tokens or provide liquidity. Uniswap utilizes liquidity pools to create more efficient markets. Uniswap protocol adds a pair of tokens to a smart contract. Users can buy and sell this pair of tokens.
- All Time Volume – $234B+
- Liquidity Provides – 72K+
- All Time Trades – 45M+
- DeFi Integrations – 200+
- Token Pairs – 35652
- 24H Volume – $1.1B
- Total Liquidity – $8.2B
- Token Lists
Liquidity Provider Fee
Uniswap charges a 0.3% fee for swapping tokens. The swapping fee is deposited into the liquidity reserve.
Currently, Uniswap does not charge any protocol fees but in the future, there is a likelihood of a 0.05% fee to be turned on.
Uniswap Pros and Cons
- Users have full custody of their coins
- Flash swaps
- Low fees
- Only supports ECR-20 tokens
- Fake coins
- Transaction failures due to low gas fee, maximum price, and insufficient liquidity
SushiSwap is a decentralized community-run exchange functioning on Ethereum. SushiSwap is an advanced fork of Uniswap. It processes token swaps and yield farming through AMM smart contracts. SushiSwap was controversially launched in 2020. The founding team of SushiSwap copied the open-source code of Uniswap to create SushiSwap. Similar to Uniswap, SushiSwap uses a collection of liquidity pools. SushiSwap is a popular platform after Uniswap because it provides access to newer and less liquid cryptocurrencies which are unavailable on traditional DEXs.
Sushi protocol is governed by community vote and community vote is responsible for all the major changes in the protocol.
SushiSwap mirrors a conventional exchange where users can buy and sell distinct crypto assets. The traded tokens are maintained through smart contracts. The users lock crypto on the platform and traders can access them.
- Total Liquidity – $5.5B+
- Total Volume – $59.7B+
- Total Pairs – 1,063
- Discord Members – 25k+
- Sushi Holders – 150k+
- SushiSwap AMM
- BentoBox Dapps
- Kasha Lending
SushiSwap charges a trading fee of 0.3% and there is also a transaction fee while approving tokens. Each token needs approval only once.
SushiSwap Pros and Cons
- Support from main DeFi names
- 0.05% of the exchange trading fee is awarded to xSUSHI token holders
- Fair playing field
- Controversial creation
- Only one audit report before the launch
- Anonymous team
3. 1Inch Exchange
1inch is a distributed network to unite decentralized protocols. It is a DEX aggregator running on Ethereum and Binance Smart Chain (BSC). 1inch picks the cheapest crypto prices across DEXS and helps its users to avoid checking every exchange to find the best price for a swap. 1inch brings profitable and protected operations in decentralized finance. Launched in 2020, 1inch provides access to substantial liquidity for swaps over 77 connected sources i.e. 53 on Ethereum and 24 on BSC. This DEX aggregator focuses on security, speed, and quality output.
1inch launched an AMM exchange Mooniswap that aims at minimizing impermanent loss and brings more value to liquidity providers. 1inch established own cryptocurrency i.e. 1INCH. It is a ‘governance token’ that lets the users vote on the performance of 1inch.
- Total Liquidity – $310M+
- Total Trading Volume – $6.5B+
- Total LP earning – $28M+
- 1INCH distributed through liquidity mining programs – 83M+
- Ethereum Network Total Volume – $33.1B+
- Ethereum Network Trades – 1.1M+
- Monthly Active Users – 40k
- Ethereum Network Liquidity Sources – 53
- Binance Smart Chain Total Volume – $3.6B+
- Binance Smart Chain Trades – 750k+
- Monthly Active Users – 39k
- BSC Liquidity Sources – 24
- Governance Rewards – $9.2M+
- 1INCH Token Staked Value – 42M
- Voting Addresses – 9k+
- Protocol options under control – 6
- 1INCH Token Current Price – $6.81
- Circulation Supply – 160M
- Total Supply – 1.5B
- Holders – 87k
- Supported Networks – 2
- Access Liquidity Sources – $19B
- Protocols connected – 70+
- Supported languages – 8
- Contributors – 50+
- Backers – 20+
- Partners & Supporter – 20+
- Countries – 10+
- Liquidity Protocol
- Aggregation Protocol
1Inch Exchange is free of cost and does not charge any fees or commission for its services, deposits, and withdrawals. However, you have to pay the gas cost of your transactions.
1inch Pros and Cons
- Intuitive interface
- No deposit and withdrawal fees
- No exchange services fee
- CHI Tokens reduce transactions cost
- High liquidity
- AMM Mooniswap
- No fiat options
- Hard to use for beginners
- The Infinity Unlock might be vulnerable
PancakeSwap is a DEX on Binance Smart Chain for swapping BEP-20 tokens. It was founded in 2020 and appealed to tons of new users because of its innovative breakfast-themed products, fast transactions, and lower fees. PancakeSwap uses AMM (automated market maker) model.
PancakeSwap’s governance token is called CAKE. This CAKE token is tradeable on Binance, PancakeSwap, Gate.io, KuCoin, and several other DEXs. PancakeSwap allows you to farm CAKE. On the PancakeSwap farm, you can deposit LP tokens. Some popular LP token pairs are:
- CAKE – BNB LP
- BUSK – BNB LP
- BETH – ETH LP
- USDT – BUSD LP
- USDC – BUSD LP
- DAI – BUSD LP
- LINK – BUSD LP
- TWT – BNB LP
On PancakeSwap, you can make a point of your crypto in three ways
- Instantly swap crypto tokens without any account or registration
- Trade directly from your wallet app with 100% ownership of your crypto
- Earn free tokens by staking CAKE
- Earn CAKE by staking LP tokens
- Earn more CAKE by staking CAKE
- Earn trading fee by staking your tokens in LPs (Liquidity Pools) even if your trading pair is not supported
- Win PancakeSwap Lottery
- Participate in trading competitions and games and win collectible NTFs
- Win BNB by predicting about BNB price
- Yield Farming
- Syrup Pools
- 0.2% fee on all token swaps
PancakeSwap Pros and Cons
- Fast transactions
- Intuitive interface
- High rewards
- Code audit
- Conversion of ERC-20 tokens to BEP-20 is costly
- Providing liquidity to pools can lead to impermanent loss
Bancor is an on-chain liquidity protocol that can be applied on any smart contract-enabled blockchain. The Bancor Protocol is an open-source standard and permissionless ecosystem to create Smart Tokens. Smart Tokens, also called automated liquidity pools, decentralized liquidity pools, or bonding curves is the world’s first blockchain-based automated liquidity pool (AMM) that can be exchanged through blockchain-based smart contracts. It is an open marketplace with no barriers where traders, liquidity providers, and developers can participate freely. Founded in 2016, Bancor does not require a match between two parties and makes use of a reserve method to automate price discovery and continuous liquidity for tokens.
With Bancor, you can:
- Trade tokens on blockchains e.g. Ethereum
- Provide liquidity
- Borrow against a liquidity position
- Use a liquidity pool
- Offer a liquidity pool for whitelisting
- Integrate Bancor liquidity and trading
- Total Liquidity – $2.285B+
- 24h Volume – $107.313M+
- BNT Price – $7.66
- Total BNT Staked – 76.83%
- Bancor Trading
- Bancor Pools
- Bancor Data
Bancor does not charge any deposit fee. However, Bancor trading and withdrawal fees vary from exchange to exchange.
Bancor Exchange Fees (by exchange site)
Bancor Pros and Cons
- Easy to use
- No deposit fee
- Liquidity protection
- Research material
- Requires technical knowledge
- Confusing for beginners
- No fiat support
Though Decentralized Exchanges (DEXs) have their own issues and limitations, yet they have earned a good name in cryptocurrency trading where the community enjoys all the rights and ownership. The idea working behind DEXs is to maximize trading outcomes by maintaining security, privacy, and convenience. While DeFi is continuously evolving we can hope that the best from DEXs will appear favorably over time.