There are many different reasons why organizations are interested in blockchain and decentralization. Finance experts are interested in how it will disrupt traditional financial institutions, while supply chain experts are eager to see how it revolutionizes the logistics sector.
However, many cryptocurrency exchanges aren’t even technically “decentralized.” Two of the most popular crypto exchanges in the world, Coinbase and Binance, are centralized, meaning that a company owns and operates them and profits directly from its operations. If a crypto exchange acts as a financial intermediary, it can lead to some of the same issues that individuals and organizations experience with banks.
A centralized crypto exchange can potentially be hacked, and they also often collect data on their customers. A decentralized exchange involves P2P trading facilitated by smart contracts but allows for more privacy and anonymity. While a centralized exchange actually holds your private keys, or funds, this doesn’t happen with decentralized platforms. A decentralized exchange, or DEX, is truly permissionless.
The decentralized exchange has exploded in popularity among crypto enthusiasts and traders, especially over the past year. Let’s examine the benefits of a decentralized exchange, why decentralization matters, and the best DEX protocols out there.
Why consider a decentralized exchange?
There are various reasons why someone might consider investing or trading with a decentralized exchange. Some investors might appreciate that it is much more difficult to hack DEX protocols, while others may enjoy the lower transaction fees. The DeFi sector is growing thanks to more investors interested in decentralization, anonymity, lower fees, and other incentives. It offers true decentralization while centralized crypto exchanges do not.
In a watershed moment for the DeFi sector recently, a decentralized exchange experienced more volume than Coinbase, one of the world’s most popular centralized cryptocurrency exchanges. The DEX is called dYdX, and it facilitated over $4.3 billion in volume, compared to $3.7 billion for Coinbase. The founder of the DEX, Antonio Juliano, left Coinbase five years ago.
Popular decentralized exchanges and their features
Some exchanges are known for specific features or advantages that help them lure away crypto investors from other DeFi protocols. Let’s take a closer look at some of the most popular decentralized platforms and what they have to offer.
dYdX
As of press time, dYdX is the most popular decentralized exchange globally, as it recently overtook Coinbase’s volume. The platform launched in 2017 but has grown significantly since then. The exchange offers margin trading and also lets users borrow and lend their digital assets. Unlike many other DeFi platforms, dYdX tokens are also used for governance purposes.
For investors/traders interested primarily in rewards, dYdX offers both mining and trading rewards. The exchange provides rewards for liquidity providers, as well. Many investors have already noted that the DYDX token price remains relatively stable amid market fluctuations, encouraging investors to stake more tokens. However, it is not ideal for novice crypto investors/traders.
Uniswap
An extremely popular decentralized exchange is Uniswap. Uniswap attempts to solve one of the major issues regarding decentralization: liquidity. The platform is an Ethereum-based protocol that allows for the trading of ERC-20 tokens.
Uniswap was created by Hayden Adams, a former Siemens engineer. He founded the Uniswap protocol in 2018 thanks to a $65,000 grant. Uniswap allows for a more permissionless way to “swap tokens,” rather than trade on centralized exchanges. It’s also known as a platform where ERC-20 tokens can be launched easily.
Cryptocurrency investors can trade thousands of ERC-20 tokens on Uniswap. It’s also relatively easy to use, and doesn’t have a KYC verification process. For swapping tokens, crypto traders are charged a 0.3% fee. Instead of a typical order book, the exchange uses liquidity pools. For those looking to earn passive crypto income by becoming a liquidity provider, Uniswap is often the top choice.
Unlike other platforms, Uniswap is completely open source. It also supports various third-party integrations and emerged as one of the first popular decentralized crypto exchanges.
PancakeSwap
PancakeSwap is a decentralized exchange that exists on the Binance Smart Chain. The platform was founded by a group of anonymous developers in September 2020 and has grown exponentially since then. Today, it’s one of the largest DEX protocols in the world. Users trade against a liquidity pool, and its native token, CAKE, can also be staked and farmed.
PancakeSwap is known to provide a faster and more seamless trading experience for its users as well. It also emphasizes transparency and security, regularly undergoing third-party audits. The platform also integrates deflationary protocols to protect investors.
PancakeSwap has stood out from the competition because it allows users to invest in NFTs and offers more gaming options than many other DEX protocols. It has also become popular thanks to its higher APR/APY rates for its liquidity pools and farms. There are also four “lotteries” per day.
Future DeFi outlook
While DeFi may still have some issues regarding liquidity and scalability, it is clear that there is a massive demand for decentralized financial ecosystems where users can borrow, lend, and exchange their digital assets. Still, the future of the decentralized exchange is uncertain.
The decentralized exchange is not just important for investors that are concerned about third-party risk or wealthy whales that are hoping for more anonymity. It can also help in terms of providing more options for the unbanked and empowering underprivileged communities with more access to financial products and services.
This is largely because many countries still don’t know how they will regulate cryptocurrency markets, while other countries have attempted to completely crack down on the sector. Incredibly, this may even help the DeFi sector, with Uniswap volume growing after the China crackdown of 2021.
Even though Uniswap and other DEX protocols are growing, there is also the question of whether decentralized exchanges are actually legal. In 2021the SEC is now launched an investigation of Uniswap, but the securities violation charges have since been dismissed. If the past several years are any indication, crackdowns may not affect DEX protocols like they have affected other cryptocurrencies. Many decentralized exchanges are also trying to outdo competing platforms with better features and incentives.
What’s next?
No matter what regulation does eventually come about, the fact remains that the DeFi sector continues to grow. It is likely that the rise of the decentralized exchange will only continue, especially as long as platforms are rolling out new features that incentivize cryptocurrency investors, traders, and enthusiasts.
About the Author
Neil Mathew
About Decentral Publishing
Decentral Publishing is dedicated to producing content through our blog, eBooks, and docu-series to help our readers deepen their knowledge of cryptocurrency and related topics. Do you have a fresh perspective or any other topics worth discussing? Keep the conversation going with us online at: Facebook, Twitter, Instagram, and LinkedIn.
