Stock exchanges and stock trading have undergone dramatic technological advances over the past century with the advent of computers and the internet. However, the most dramatic advance is happening right now. I’m referring to the rise of blockchain technology and the decentralized exchange — or DEX.
When most people think of “exchanges” they think of centralized exchanges such as NASDAQ and the New York Stock Exchange (NYSE), or brokers such as Fidelity and TD Ameritrade. These exchanges are considered to be centralized because they are run by a central organization.
In essence, DEXs are used to trade cryptocurrency directly with other buyers and sellers without using a centralized organization as a “middleman.”
Decentralized exchanges are distributed across a wide network of computers and governed by their stakeholders. Anyone can become a stakeholder in a crypto DEX, share in its evolution, and benefit financially from its growth. The DEX’s we’ll cover here are 1inch (1IN), Compound (COMP), Curve Finance (CRV), PancakeSwap (CAKE), SushiSwap (SUSHI), and Uniswap (UNI).
As with a traditional centralized exchange, in order to buy and sell on a DEX users must deposit funds (fiat money or crypto). Those funds can later be withdrawn into a bank or into your private crypto wallet for self-custody.
DEXs aren’t just for crypto
DEXs are typically thought of as cryptocurrency exchanges — places where you can purchase cryptocurrencies such as Bitcoin (BTC), Ether (ETH), Cardano (ADA), Polkadot (DOT), Polygon (MATIC) and the like.
However, the distinction between a traditional exchange and a crypto exchange is currently being blurred by the fact that stocks and other assets can easily be “tokenized.”
Popular stocks such as Tesla, PayPal, Amazon, GameStop, and even centralized exchange Coinbase have been tokenized. Unlike trading on a typical stock exchange, tokenized stocks and other assets can be traded on a DEX 24/7.
Centralized crypto exchanges
Along with DEXs, there are also centralized crypto exchanges. Some centralized exchanges, such as Coinbase, can be publicly traded on the stock market. Others such as Binance, Gemini, and Kraken are privately held corporations. The only way for the average investor to buy into them is to own their native cryptocurrencies.
Below are brief overviews of the top six DEX’s. These are listed in alphabetical order. This is to avoid the impression that I’m recommending one over the others.
And at the end of this article is a video about crypto exchanges for those who want to learn more.
None of this is intended to be investment advice. Be sure to do your own research before investing in cryptocurrencies.
The 1inch DEX is actually a DEX exchange aggregator. What this means is that it pulls price data for thousands of cryptocurrencies from other exchanges and presents users with the lowest available price. Trades can be routed to whichever exchange has the best price and lowest fees for the coin in which the buyer is investing or trading. 1inch currently supports 21 centralized and decentralized crypto exchanges including liquidity sources on Ethereum, Polygon, and Binance Smart Chain.
1inch charges no fees of its own. Any fees paid for a transaction are paid to the exchange on which the trade is carried out. 1inch is probably not the best DEX for newbies in the crypto market who haven’t yet tackled the idea of self-custody via crypto wallets.
The Compound DEX was created by economist Robert Leshner in 2017. Compound specializes in what’s known as tokenization. What’s so interesting about Compound is that it uses what are called cTokens to let users earn interest on deposited assets without locking them up. For example, USDC (a stablecoin, the value of which is tied to the US dollar) can be turned into cUSDC tokens. cUSDC tokens can earn interest (generally paying much higher rates than a traditional savings account) but can also be converted back to USDC at any time, along with the earned interest.
Compound supports tokens on 12 markets, including BAT, ETH, DAI, UNI, USDT and LINK. As with 1inch, Compound doesn’t charge fees of its own. Rather buyers pay Ethereum gas fees which can vary. (Gas fees are essentially transaction fees.) Depending on the current gas fees it might not make sense to make small trades as the fees could eat up any profits. Experienced traders will take quickly to Compound’s user interface. However, newer traders will find that it has a somewhat steeper learning curve.
The Curve Finance DEX was developed by Michael Egorov, CTO of network security company NuCyphernother. Curve is used for swapping between stablecoins and tokenized versions of stablecoins. It is considered a decentralized liquidity aggregator. On Curve, users can earn interest by adding assets to liquidity pools. A liquidity pool is a collective fund used to facilitate decentralized lending.
There are 17 liquidity pools on Curve including USDT, USDC, BUSD, DAI, and TUSD. Curve Finance fee on all pools is 0.04%. Half of that goes to liquidity providers and the other half goes to those holding the veCRV tokens (“ve” stands for “voting escrow”).
PancakeSwap is a clone of Uniswap (which is discussed below). PancakeSwap runs on the Binance Smart Chain (BSC). PancakeSwap lets users trade hundreds of different BEP-20 tokens including Binance coin (BNB), ETH, Pancake Bunny (BUNNY), SAFEMOON, and Dogecoin (DOGE).
PancakeSwap charges a low 0.2% trading fee per transaction. Gas fees are paid through BSC and have typically been lower than Ethereum gas fees. Ethereum’s ERC-20 tokens can also be converted to BSC’s BEP-20 tokens. PancakeSwap’s user interface is a bit easier to understand for less-experienced traders.
The SushiSwap DEX allows users to place buy and sell offers and swap tokens directly with each other. This popular decentralized finance platform was created in 2020 by the pseudonymous Chef Nomi. It’s built on a clone of Uniswap and runs on Ethereum’s blockchain. SushiSwap rewards users for locking up funds.
Something in the neighborhood of 1,400 tokens are available to trade on Sushi including AAVE, BAL, MATIC, and UNI. Governance of SushiSwap is the domain of holders of SUSHI tokens who can propose and vote on changes to this DEX. SushiSwap charges a 0.3% fee for trading plus Ethereum gas fees. SushiSwap also offers a simple user interface that’s great for less experienced crypto traders.
Uniswap is one of the most popular platforms in the defi ecosystem. This DEX, created in 2018 by former Siemens mechanical engineer Hayden Adams, also runs on Ethereum and allows users to trade more than 5,000 ERC-20 tokens including AAVE, WBTC, ETH, DAI, and USDT.
Uniswap charges a 0.3% fee for trades. Fees are deposited into liquidity reserves. Uniswap doesn’t have a “know your customer” (KYC) verification process, meaning no I.D. is required to open an account. Beginners need to be careful with Uniswap because anyone can list fake coins on this DEX.
Decentralized crypto exchanges facilitate electronic peer-to-peer trading of cryptocurrencies and tokenized assets — no banks or corporate exchanges required. Whereas banks are run by a board of directors, DEXs are run by the “customers” themselves.
Keep in mind, there is always some risk in trading cryptocurrencies and tokens. Although no DEX has ever been hacked, there have been cases where nefarious hackers have siphoned funds from a DEX.
Before getting involved with DEX trading newcomers to crypto should spend some time learning about the various blockchains, their value propositions and utility, their “tokenomics,” (will cover tokenomics in another post), and how to use crypto wallets.
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Source: https://medium.com/swlh/what-is-a-dex-centralized-vs-decentralized-cryptocurrency-exchanges-88aaf766b239?source=rss——-8—————–cryptocurrency
