Unsurprisingly, one of the biggest innovations in cryptocurrency has been largely overlooked. This simple equation has been able to facilitate the decentralized exchange, as well as disrupting market making.
Permissionless networks are designed to eliminate the middlemen – banks, agents and dealers who stand between people who want to do business. They not only charge outrageous fees to provide unnecessary services but also have a lot of power that is often abused.
Consider an equity exchange. There’s a traditional order book that contains bids and offers from both buyers and sellers. All these traders? It turns out that many aren’t investors who want to own or sell a part of an organization. The majority of trades are from market makers, who have a very questionable reputation. Later, we’ll talk more about them.
How does DEX help with all this? It all began with an innocent equation that was written down on a piece of paper. “a. “b = k”.
The History of DEX
So how do you run an exchange without market maker manipulation or corrupt investors influencing prices? You use an AMM (AutomaticMarket Maker). Liquidity is provided to the traded pairs through a liquidity pool, funded by anyone who has tokens to invest. That’s me, you, and ‘Joe bag of donuts,’ as well as institutional investors and crypto-whales. It works like this.
Let’s say you have a pair of trading pairs, AVAX/ MATIC. Investors buy a predetermined proportion of the tokens to form a pool. In this example, ‘a = AVAX’ and ‘b = MATIC. The total pool value will never change if you use a ‘k’. It’s as simple as that. We adjust “a” and “b”. Maths lesson done.
If someone purchases MATIC using AVAX, AVAX will be added to the pool and MATIC removed. To keep the values constant, the token values are adjusted to account for “k”. Slippage is the change in value relative to each other. This is not a problem in deep pools with tokens worth millions of dollars. If there is enough liquidity, even large trades won’t affect the pool.
The tokens are priced correctly until someone tries to purchase too many, which causes the prices to be distorted. The underlying token price changes radically can cause other issues. The liquidity pool must be adjusted to reflect the newE relative value of AVAX and MATIC. This hazard has a name. This is called temporary loss.
The loss is a “lost opportunity cost” because your dollar stake will remain the same but you will hold fewer tokens. I live primarily in cryptocurrency and not US dollars so the loss seems permanent.
The original AMM algorithm has been improved to reduce slippage as well as temporary loss. You should be aware of the risk associated with an illiquid token pool. When the market is booming, it’s great, but when we have another crypto winter people are sure to consolidate their holdings. First, the most risky assets will be liquidated. These include utility tokens in DeFi liquidity pool stakes.
What do I want from a DEX system?
I merely require multiple Exotic tokens, guaranteed pseudonymity, great security, low gas fees, deep liquidity, and a great user experience. Oh, and the chance to invest my crypto for a substantial yield. That’s not much to ask, surely? In these early days of DeFi technology, it probably is a lot to ask. Most DEXs do most things well, but there are questions over hacks, rug-pulls, wallet interactions, and many other issues as yet not even thought of.
Which DEXs will best meet my needs?
Best decentralized exchange 2022 – List
Below, we take a look at the most popular DEXs that have been around for a while, and also some of the newer platforms. The DEX you choose might be dictated by the token you are trying to buy, but you should still do some basic risks assessment. There are links for all of the DEXs, but watch some Youtube tutorials and see what the good folks at Reddit have to say about each platform.
I’m going to give you a tip: visit the Defi Pulse Website and get the inside scoop on the best DeFi Apps. The rankings are based on the value of each protocol. You can click on any platform to see a complete set of charts and statistics.
When Uniswap emerged back in 2018, DeFi was not on anyone’s radar. They’re one of the OGs of atomic swaps. It’s a straightforward AMM (Automatic Market Maker) that draws on global liquidity pools for ERC20 assets. You connect your DeFi wallet when prompted and you’re ready to swap your tokens. No personal details are required, just a standard DeFi wallet for ERC20 tokens. Right now, Uniswap is the most popular and probably best crypto dex by far.
Set the time and slippage limit. After you click swap, your DeFi wallet will authorize the exchange and you’ll have to wait until it completes.
Click on the Pool icon at the upper right corner of the Uniswap window to stake your tokens into a liquidity pool. Choose a liquidity pool to which you want to contribute and then select the stake amount. You’ll have to enter the exact same amount of dollars for each token (or an agreed-upon proportion). Authorize transactions using your DeFi wallet, and then confirm them on the Uniswap App. You are done, now you can stake and earn rewards.
The liquidity providers receive a percentage of the fees (0.3%) charged by token swaps. This is great for when the trading volume is large and the crypto markets are booming. Remember the above risk of temporary loss.
Uniswap offers several new features such as a hyper-minimal interface. This DEX didn’t offer a utility token at first, like many other DEXs. You could then invest in a liquidity pool without needing to acquire another exchange token. A popular governance token is UNI.
It’s open source, non-custodial and does not require users to trust any middlemen.
Once regarded as a meme, the Sushiswap DEX is a direct clone of the original Uniswap AMM. Of course, there’s the obligatory governance token, SUSHI, but they have a different approach to earning rewards from the transaction fees. Sushiswap have also worked on their user interface, distinguishing itself entirely from the original, Uniswap.
Sushiswap stated its goal to increase the democratic nature of decision making and distribute staking rewards for liquidity pools more fairly. Both Uniswap & Sushiswap charge 0.3% swap fees, however Sushi pays a percentage of that to SUSHI holders in the form of more SUSHI. It was intended to allow early adopters, rather than whales who bought into the project with little risk to become major shareholders.
Sushiswap enticed Uniswap’s liquidity providers with increased rewards in the initial stages. The ‘Vampire Attack’ was successful and Sushiswap began operating within weeks. The rapid success of this company is even more amazing, as we didn’t know anything about its founders. 0xMaki, and Chef Nomi (not their actual names), pulled off something special in the DeFi World with Sushiswap.
Che Nomi sold off all of the funds to develop for 17 million dollars, and then bailed. This is what happens when tokenomics fail and founders are not known. I’m amazed that Sushiswap was ever started and has been successful. It’s still a thing today.
It seems that despite the scandals, this has worked. Sushiswap is ranked #9 in the charts, with almost four billion dollars invested and providing liquidity. The SUSHI Token has been a popular altcoin due to its direct connection with the DEX. The ERC20-compatible DEX works great to swap tokens until Ethereum gas is charged.
For a brief period, PancakeSwap peaked as the largest DEX of them all. Since then it has fallen away slightly but remains a significant player on the Binance Smart Chain. PancakeSwap is yet another clone of Uniswap, which explains the almost identical application. So what’s PancakeSwap’s killer app?
You can also stake your Binance Smart Chain (BEP20) tokens into liquidity pools. The Cake token is used to pay you. It can be staked at PancakeSwap. Cake has a lottery, and there’s a small NFT market. Uniswap offers many exotic trading pairs and tokens. Make sure that your chosen cryptocurrency is supported by PancakeSwap.
PancakeSwap charges a transaction fee of around 0.2% for the exchange of ERC20 tokens. It’s cheaper than Uniswap but who cares when the fees are so low? Ethereum’s gas fee is a major issue. It must be paid in ETH. These fees make small transactions like a few hundred bucks prohibitively costly. PancakeSwap, on the binance intelligence chain, has extremely low fees.
Ethereum 2. is supposed to solve the problem of crippling Ethereum gas fees. Hope so! In the interim, binance will be a more useful blockchain to most users, while PancakeSwap has been proven as a BEP20 dex.
Curve FInance is yet another AMM that uses liquidity pools to facilitate token swaps between stablecoins and dollar-pegged crypto assets. There are all the standard features plus a few more options under the advanced tab, including optimization for order routing and fees. Again, all transactions are authorized through your DeFi wallet.
Curve has a competitive edge in the form of reduced slippage through their Bonding Curves, an innovation that is one of many enhancements to the original AMM formula. Curve is the fourth chart on the Defi Pulse, with over 11.5 billion locked in their staking pool. Curve, which is only a little over a year-old, has become the platform of choice for stablecoin swapping. The risk of a temporary loss is minimal, as the price of stablecoins does not vary much over time.
There’s much more to Balancer than token swaps. They offer automated portfolio management on top of their liquidity management and price sensing tools. The impermanent loss issue is different with Balancer as you may invest any tokens in any proportions to support the liquidity pools. This is great if you intend to stake your ERC20 tokens and earn rewards, while still being exposed to the underlying token’s price action.
balancer ranks 11th on Defi Pulse with staked assets of 1.85 billion dollars. It’s the ability to create private and public liquidity pools with tokens of any size, ratios or fee structures that you want. You can choose from over 2,000 pools that are already public.
The bespoke liquidity pool allows for a wider range of options in trading and yield farming. The original AMM equation is improved by clever math. Do your homework before entering a stake pool.
There are other decentralized exchanges that deserve mention
IDEX – https://idex.market/
ForkDelta – https://forkdelta.github.io
Etherdelta – https://etherdelta.com
RadarRelay – https://radarrelay.com
Kyber Network – https://kyber.network/
DDEX – http://ddex.io
ERCDex – http://ercdex.com
Dextroid – https://www.dextroid.io/
Paradex – https://paradex.io/
Bancor – https://www.bancor.network/
Dubiex – https://dubiex.com
Trade Airswap – https://trade.airswap.io/
EasyTrade – https://easytrade.io/
The conclusion of the article is:
If you use DEXs, try to use a reputable platform. Make sure your DeFi wallet is sound, and never give up custody of your tokens to any DeFi platform. Remember that staking for rewards and supporting liquidity pools is risky. Be aware of the potential impermanent loss, and if the rewards seem too good to be true, they probably are.
Market crashes are another risk that is always present. They can cause liquidity pools to be under pressure and make it difficult or impossible to get out of a bad position. If the markets were depressed, I’d be reluctant to stake my crypto into a DEX liquid pool.
DeFi and Future Thoughts
Who knows what will happen between DeFi protocols and financial regulators. Are the temptations of regulatory protection too strong for a DeFi industry that desperately craves acceptance and respectability? Will more deeply principled personalities prevail and stay true to the permissionless, trustless, financial system that Satoshi envisaged?
DeFi still has risks. Even “Unknown Unknowns” are a problem to describe. The responsibility of personal sovereignty is immense. We are so used to having our bank manage our money to the tune of $250,000 that we fail to see what is happening.
Take a look at this. Consider this. When Bonnie and Clyde robbed the local bank a client would not come into the bank a week after the robbery and be told that their money was stolen. When money is taken from high-street bank accounts today, it suddenly becomes the money of us, and not that of the bank! We already suffer from the majority of the negatives, but none of its positives.
The benefits and complications of DeFi are worth the risk and complexity for a select few. It is still not the case for most. The niche market is growing rapidly. Bitcoin was a threat that could have been stopped in its early stages, but authorities did not see it as a real one.
This time, I am not sure that government regulators are going to be duped. The SEC wants to protect the bank system, but DeFi poses a direct threat to it. This is the reason for all of the S.E.C. The current S.E.C.
DeFi’s efforts to eradicate corruption and dishonesty are evident. DeFi is the result of people becoming more aware that tech companies treat their customers as assets.
Gery Gensler is the head of S.E.C. in the US. , such as Robinhood has been questioned about their legality. Market makers and liquidity suppliers are unhappy with trading and spread fees. The exchange has a contract with them that, for a small fee, they will route trades their way instead of the most efficient liquid provider.
Bernie Madoff, the notorious fraudster who fleeced wealthy friends out of their capitals, came up with this PFOF (Payment for Order Flow). Maybe others will follow him? I doubt it. Robinhood is nothing more than a thief of the poor. Madoff stole from the wealthy.
Which side do you belong to? Both sides can coexist and I believe a solution will be found. What if that’s not the case? Hold my beer, because DeFi has nopermission!