Centralized Exchanges (CEXs) currently dominate cryptocurrency trading but Decentralized Exchanges (DEX) are soon catching up as a sturdy competitors.
It is a common consensus within the blockchain space that decentralized exchanges are the future of crypto trading. The popularity can be credited to the fact that DEXs empower the investors as the sole owner of their assets. DEXs enable peer-to-peer trading by interacting with a smart contract, without an intermediary.
According to CoinGecko, the total market capitalization of decentralized finance (DeFi) stands at $138 billion and this growth is fuelled by the decentralized exchanges. For the uninitiated, DeFi represents a vast range of lending, trading activities carried out exclusively on the blockchain networks.
Decentralized exchanges take a different approach to buy and sell digital assets: They operate without an intermediary organization for clearing transactions, relying instead on self-executed smart contracts to facilitate trading.
Decentralized Exchanges vs. Centralized Exchanges
The core of cryptocurrencies and blockchain technology is decentralization and thus, DEX has been gaining popularity alongside traditional centralized exchanges.
All CEXs retain custody of the trader’s funds and the private keys of the customer’s wallets are typically under the control of the exchange. DEX are favoured for their non-custodial framework. CEX keep their systems off-chain and transactions are not recorded on the blockchain; on the other hand, DEX users hold their private key and have complete control over their assets.
The lack of intermediaries in DEX means users don’t have to follow KYC (Know your customer) and anti-money laundering regulatory standards.
An ERC223 token, iOWN Token can currently be purchased on centralized exchanges, P2PB2B and LATOKEN. The token will be used within the blockchain-based equity crowdfunding platform, iOWNX. In the future, the iOWN Token will be available on decentralized exchanges like Uniswap.
As the name suggests, DEX operates without an intermediary for clearing transactions and relies on the self-execution of smart contracts to facilitate trading. This allows investors to trade instantaneous at a relatively lower cost than centralized exchanges.
Similar to conventional centralized exchanges, these DEXs use order books to compile a record of all buy and sell orders of a particular asset. The prevailing market price is determined by the spread between these prices. On these DEXs, although your funds remain off-chain in your wallet, the information is often held on-chain. Few examples would be Binance DEX, DDEX, dYdX, Nash Exchange, Tomo DEX, among others.
Decentralized Exchanges (Swaps)
Automated market makers (AMM) rose to popularity in 2020 and were instrumental in the DeFi boom. A DEX uses AMM to facilitate a trading system that propagates autonomy, liquidity and automation.
Swaps-enabled platforms don’t use order books to facilitate trade or set prices but utilize smart contracts to form liquidity pools to execute trades and determine pricing. Transactions between users take place instantly through the peer-to-peer process called ‘swap’. Users trade against a liquidity pool, filled with other users’ funds. When users deposit their token into the pool, they receive liquidity provider (or LP) tokens in return.
Some popular platforms include:
Uniswap allows users to swap any two Ethereum-built assets after connecting their wallet like Metamask, Coinbase Wallet, Fortmatic, etc. The protocol is reliant on a liquidity pool and allows investors to either create a staking pool of their own or participate in an existing one.
For using Uniswap, you need an Ethereum Wallet and some ETH. Next, head over to the Uniswap app to start using the protocol to provide liquidity or swap tokens. Each transaction will cost a gas fee to be executed. Creating a Uniswap pool is slightly costlier because you are executing a more complex smart contract.
PancakeSwap is a DEX built on the Binance Smart Chain for swapping BEP-20 tokens. On the platform after connecting your wallet, you can trade BEP-20 tokens, or add to the liquidity and earn rewards.
PancakeSwap allows users to farm its governance token, CAKE. Users have the option to deposit their liquidity provider tokens and earn rewards with CAKE. You can further earn more by staking your cake in SYRUP pools.
Similar to Uniswap, SushiSwap started by offering liquidity providers a token known as SUSHI. On SushiSwap, from the trading fee of 0.3%, 0.05% is distributed to the user in the form of SUSHI tokens.
Decentralized exchanges are the future of crypto trading because they entrust all ownership to the community and the processes are carried out by smart contracts. Considering they are non-custodial provides a sense of security to users. As the market for DeFi matures, DEX platforms like Uniswap, Curve, SushiSwap will emerge as a tough contender for centralized exchanges as they evolve to become more user-friendly and seamless.