Whilst a lot of attention has been given to the Decentralized Finance (DeFi) sector for its phenomenal growth in 2020, decentralized exchanges is another sector whose growth cannot go unnoticed. A combination of yield farming and the subsequent DeFi boom has helped propel daily volumes to over $500 million. Data on Dune Analytics reveal that trading volume on decentralized exchanges in the last 30 days amounted to $19.58 billion.
At the core of its innovation, decentralized exchanges, otherwise known as DEXs, are trying to do away with the traditional order book and custom price orders. In the case of DEXs, an asset’s price is determined by a mathematical formula that depends on the share of assets in liquidity pools. Furthermore, DEXs are trying to tackle some inherent problems of centralized exchanges such as a single point of failure, price manipulations, user censorship, possible security breaches, and an operator’s control of liquidity.
Decentralized exchanges typically feature permissionless asset listing, equal and fair rules for all assets, superior privacy, and better slippage for stable coins. With that said, here’s a rundown of 5 most decentralized exchanges.
Polkadex is on a mission “to achieve complete user experience and performance of a centralized cryptocurrency exchange with the added benefit of decentralized security.” It is a first of its kind in the DEX space because it is a hybrid DEX with an order book that is supported by an Automated Market Making (AMM) pool.
The decentralized exchange focuses on reducing the complexities generally associated with decentralized exchanges. By putting only items that need public verifiability on-chain, Polkadex is able to increase the throughput of trades. Features such as Order book, Trader Assets Management, On-chain market making bots, and the Bridge mechanism are kept on-chain, while trading features like trade history, technical analysis indicators, and market data aggregation are kept off-chain.
Talking about fees and trades, Polkadex supports two types of trades – Limit and Market Orders. While market-taking orders have a trading fee of 0.2 percent, market-making orders are not charged.
Bancor is often touted as the Automated Market Maker (AMM) pioneer. The project launched in 2017 and is undoubtedly one of the oldest DeFi projects. Bancor also did away with direct counter parties. It introduced the idea of order-book less trading where traders connect directly with liquidity pools. On this note, Bancor is a prominent liquidity provider used by many DeFi aggregators.
Bancor also has a unique exchange model that fulfills user trades without necessarily needing a second party. Users can exchange their ERC-20 tokens for the Bancor Network Token, BNT. The BNT can then be exchanged for other ERC-20 tokens. The end goal of such a setup is to improve liquidity for small-cap tokens.
It is also worth adding that any kind of token can be stored on the Bancor protocol using a smart contract. Smart contracts act as a reserve for a plethora of ERC-20 tokens. So, when an order is executed, the Bancor protocol searches through several smart contracts until a match is found.
Uniswap is arguably one of the hardest DEX solutions to understand. Notwithstanding, it is still one of the most decentralized exchanges. The decentralized exchange reverses what is known about the conventional market makers, order books and price points. For instance, while order books are organized using various price points on centralized exchanges, in Uniswap, orders are mixed together, leaving the AMM to define the resulting price. All the liquidity for a particular trading pair is combined and placed in two categories.
But beyond its rather complex solution, Uniswap boasts of permissionless listing, excellent UI and UX, solid analytics, and low slippage and fees. As a matter of fact, its trading volumes and fees are one of the best in the crypto space. As at press time, Uniswap (V2) controlled over 40% of the market share of the DEX space and had the highest number of markets – 1077.
When it comes to the number of users and trading volume, Binance is currently the largest centralized exchange in the world. Binance as a company is well-known for staying at the forefront of crypto evolution and for introducing innovative crypto products. It therefore comes as no surprise that the exchange quickly jumped on the DEX bandwagon.
In an interview with the Changelly team, CEO of Binance, Changpeng Zhao stated:
“Binance DEX is a decentralized exchange developed on top of Binance Chain, with low latency, high throughput, low fees and UX similar to current centralized exchanges. Oh, and you hold your keys or funds yourself. No need to deposit your funds at an exchange.”
But while Binance is still relatively centralized because it has only 21 validators, you can’t take away the fact that its liquidity is higher than most other DEXs. The DEX has 90 different trading pairs.
If this list was on the oldest decentralized exchanges, then IDEX would have been number 1. Launched in October 2016, IDEX is one of the most popular DEXs on this list.
IDEX allows its users to manage their funds through its Ethereum-based smart contract, accessed via private keys. Users can open a wallet and move funds to the exchange using any of the following MetaMask, Keystore file, Ledger Nano S, or by manually entering private keys.
IDEX offers one of the most robust trading experiences on this list. And similar to centralized exchanges, its order book is updated in real-time. However, as a downside, IDEX started implementing stricter KYC policies in 2019 and its operations are still controlled by a central authority.