There are two main ways to trade crypto: centralised exchanges (CEXs) and decentralised exchanges (DEXs). Learn all about crypto DEXs here.
Key Takeaways:
- A decentralised exchange (DEX) is a peer-to-peer marketplace where users can trade cryptocurrencies without an intermediary party.
- DEXs operate on a decentralised network, such as a blockchain.
- Users of a DEX maintain self-custody of their assets by keeping sole control of their private keys.
What Is a Crypto DEX?
Decentralised exchanges (DEXs) exist without intermediaries and serve as a cornerstone in the decentralised finance (DeFi) ecosystem. They also provide complete transparency as to the movement of funds and the method of exchange. In addition, a user’s funds don’t pass through a third-party’s cryptocurrency wallet during trading.
For example, there may not be a direct route to swap ETH for the SAND token on a particular DEX; hence, the route of exchange could be ETH swapped to USDC, then swapped to SAND — all in a single on-chain transaction.
DEXs offer greater control of the user’s assets; however, users may face slower transaction speeds and a less user-friendly interface compared to centralised exchanges, as they do not have the same resources and infrastructure.
How Does a DEX Work?
DEXs are built on blockchains that support smart contract executions. On most DEXs, every trade is subject to fees, which are paid out to liquidity providers (LPs), as well as validators of the blockchain. Essentially, users of DEXs interact with smart contracts on the relevant blockchain.
There are three main types of DEXs, all of which allow users to trade directly through smart contracts:
- Automated Market Makers (AMMs)
- Order book DEXs
- DEX aggregators
Automated Market Makers (AMMs)
An AMM relies on information provided by exchanges and blockchain oracles to set the price, where — instead of matching buy and sell orders — the smart contract uses a liquidity pool, which is funded by other users who wish to earn the fees and rewards provided by the DEX. Examples of such AMMs are Uniswap, VVS Finance, and MM Finance.
Access all of the AMMs above in one, single place via the Crypto.com DeFi Wallet. Download the app or browser extension here.
Order Book DEXs
With order book DEXs, traders can set market or limit orders. For instance, when placing a limit order, a trader sets the expected price. The limit price determines the maximum or minimum price the user wants to trade. The order will be filled if the last price reaches the limit price or better.
If there is low liquidity, the limit order will remain open until an appropriate book order match is made. Examples of such are dYdX and Loopring Exchange.
DEX Aggregators
A DEX aggregator’s goal is to protect users from pricing effects and reduce the likelihood of a failed transaction. They source liquidity from several DEXs to minimise slippage on large orders, optimise swap fees and token prices, and offer traders the best possible price in the shortest time possible.
Some DEX aggregators also use liquidity from centralised platforms to provide users with an overall better experience while still remaining non-custodial by leveraging an integration with specific centralised exchanges. Examples of such an aggregator are 1inch and ParaSwap.
Benefits of Using a Crypto DEX
Token Availability
CEXs have a selection and vetting process when it comes to token listing. DEXs, however, due to their decentralised nature, usually include any token minted on the blockchain they are built upon, provided that some assets have been pooled. This means that new projects will likely be available to trade on these DEXs before being available on CEXs.
Although traders are able to get in on projects as early as possible, it also implies that all sorts of scams can be listed on DEXs. Users need to perform their due diligence to ensure that the tokens they are looking to trade are with the correct contract and perform actions aligned with what they are trying to achieve.
Accessibility
DEXs attract a large number of users because of the speed with which a self-custodial wallet can be set up and immediately begin interacting in the DeFi space.
Potentially High APYs Through Liquidity Pool Farming
Although yield farming provides attractive yields when just depositing a token to protocols, it is not a risk-free game. Market participants should research and bear in mind the potential risks about yield farming.
Impermanent Loss (IL) is the unrealised loss incurred due to the changes of a token’s price, leading to tokens becoming less valuable than if they had been held without participating in a liquidity pool or yield farming. No matter the rise or drop of the price for the staking token, IL exists unless the token’s price returns to the initial state.
Challenges of Using a DEX
Specific Knowledge Required
DEXs are accessible using non-custodial wallets that can interact with smart contracts. Specific knowledge is required to choose the correct wallet and fund it with the correct tokens in order to pay the gas fees required to swap or move other tokens on that network.
Users have to learn how to use these wallets because they need to connect to the appropriate blockchain network for the DEX, and they also need to understand security-related concepts associated with keeping their funds secure.
Dealing with slippage can be challenging even for experienced users, as it is near impossible to avoid slippage when purchasing tokens with less liquidity. Often, slippage tolerance on DEX platforms has to be manually adjusted for orders, and adjusting slippage can be technical; some users may not fully understand what it means.
Users can commit various errors that may lead to a loss of funds if they do not have specific knowledge. These errors can include withdrawing coins to the wrong network; overpaying transaction fees or, conversely, setting a transaction fee that is too low and getting the transaction stuck; or losing out to IL.
Smart Contract Vulnerabilities
Smart contracts on blockchains are generally publicly available for users to review the code for potential bugs or vulnerabilities. Some of these contracts used by DEXs are audited by independent professional firms that help secure the code. Nonetheless, such vulnerabilities can still slip past audits and other code reviews, especially after an update is performed, and are privy to potential new exploits that can cost users their tokens.
Users exploring DEXs should always perform due diligence on the team involved on the DEX, as well as the tokens they intend to trade.
Unvetted Token Listings
Anyone can list a new token on a DEX and provide liquidity by pairing it with other coins. This can leave traders susceptible to scams like rug pulls or copycat tokens, which seek to make DEX users believe they are buying into a different token.
Some DEXs combat these risks by repeatedly reminding users to verify the smart contract of the tokens they are looking to buy. While this solution works for experienced users, it circles back to the fact that specific knowledge or awareness is required.
Which Is the Best Crypto DEX to Use?
In conclusion, whether or not a DEX is suitable for a user depends on their specific needs and preferences. DEXs offer several advantages, such as a user’s ability to trade directly from their non-custodial wallet, thereby maintaining control of their assets.
However, DEXs also come with certain disadvantages and may not be suitable for those who are new to cryptocurrency trading or require more advanced trading features. DEXs may also have lower liquidity and varying fees depending on the exchange. It is important for users to carefully consider their own needs and do their own research before deciding which DEX is the right choice for them.
The Crypto.com DeFi Wallet
The Crypto.com DeFi Wallet suite of products is available through a mobile, desktop, or browser extension. Users can access popular DEXs like VVS Finance, Uniswap, or 1inch — all in one app — and seamlessly connect with some of the most popular DeFi protocols.
Users can also:
- Swap 1,000-plus tokens across multiple chains, including Ethereum, Cronos, Cosmos, and more.
- Migrate assets between different chains and Cronos with the in-app bridging feature.
- Easily manage 1,000-plus tokens across 30-plus blockchains, including Cronos, Crypto.org, and Ethereum.
- Send crypto at their preferred confirmation speed and network fee. Crypto.com’s ETH Gas Meter gives users real-time updates on gas fees and transaction speeds.
Download the Crypto.com DeFi Wallet App or browser extension here.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
