The $40 billion DeFi market is fueled exclusively by the very best decentralized exchanges, a type of trading platform that we respect as a guardian of blockchain technology and its decentralized spirit. If you are in need of quality DEXs and an explanation of why they are important, you have found the right guide.
How can we call ourselves true cryptocurrency supporters if we buy coins and tokens through centralized exchanges? The ethos of decentralization is vital for crypto’s survival, and thankfully enough, the popularity of decentralized exchanges (DEXs) reveals that there is still hope for preserving traditional blockchain values.
Our new type of trading platform helped with reviving crypto by bringing entirely new features and methods of making money. It sparked the yield farming craze, implemented voting powers through governance models, and even led to crypto loans.
DEXs successfully compete with CEXs and even major companies like Coinbase have trouble contesting decentralized liquidity protocols like Uniswap. We trade in an environment entirely different compared to the last bull run. On that account, how can anyone interact with cryptocurrencies without knowing about the best decentralized exchanges?
We will give you a helping hand in discovering these great platforms, but before we do that it would be wise to first learn more about the importance of decentralized exchanges.
A guide to decentralized exchanges
If you are here for the exchanges and not the story behind them, we recommend that you skip these sections and head straight to our Top 5 DEXs list. Otherwise, satiate your curious mind by discovering both their importance and powerful influence on the entire crypto market.
Decentralized exchanges have almost casually entered the crypto space in 2020, when all seemed lost as a result of increased volatility. Cryptocurrencies have once again had trouble with protecting their value, as the onset of a pandemic and economic crisis have critically worsened the state of financial markets.
Slowly but surely, DEXs have increased in size and began to ‘steal’ liquidity from CEXs. The chain of events resulted in the creation of a new market segment: decentralized finance (DeFi).
DeFi took the world by storm as it went from a valuation of $1 billion to $10 billion over the course of the summer. Almost a year later, since the fun started, DeFi is worth more than $40 billion.
Let’s be real. Everyone thought that DeFi was a fad and that it would ‘pop’ just like ICOs did a few years ago. All projects were token swapping platforms rather than proper exchanges, often carrying weird food names. Decentralized exchanges had the status of a ‘meme’ in the crypto community, and there was nothing serious about it that could convince us otherwise.
Not to mention, the crazy returns brought on by yield farming has cemented that line of thought by making us believe that the segment will not last for long - lo and behold, here we are.
Why are decentralized trading platforms so important?
Decentralization will always represent the core ethos of cryptocurrencies and blockchain technology, no matter what the market looks like or who participates in it. At the current stage, where users are (believe it or not) still early adopters, it is important to safeguard decentralization and favor it as much as possible.
Since the early days of Bitcoin, crypto exchanges were always centralized. Those who remember the early days of Mt. Gox understand why ‘not your keys, not your coins’ is such a gigantic understatement when said today. Without non-custodial trading grounds, there is really no time or place for boasting about the decentralized nature of the technology that we use.
As such, decentralized exchanges have rekindled a flame that was long forgotten. They bring power to the investor by treating him as the sole owner and operator of his assets. No one else has a say, and neither can anyone restrict the investor’s capital - freezing assets or delaying someone’s transfer is impossible, as it should be.
Ownership is strictly defined, and any actions taken are processed by smart contracts and commanded by the user. Is there anything more beautiful than that? Nevertheless, the question of custody is not the only positive feature that DEXs bring.
Main features of DEXs
Decentralized exchanges function through the use of an Automated Market Maker (AMM): a smart contract that processes orders by utilizing incoming liquidity provided by traders and existing on-chain liquidity reserves.
Rather than trading with an exchange’s order book, users trade with other users by interacting with a smart contract. Such a method might be ideal for the blockchain industry, but it still has its set of pros and cons:
Decentralization. Smart contracts are predefined agreements that operate by autonomously executing commands. Combined with governance models, DEXs effectively transfer ownership of both the platform and assets to its users. Obviously enough, there is no centralized entity.
Non-custodial. Traders and liquidity providers interact with DEXs directly from their crypto wallet, retaining full custodianship of their assets. All transactions are subsequently defined and processed via smart contracts.
Lack of manipulation. CEXs are infamous for manipulating markets and conducting insider trading. With no one there to benefit from such actions, DEXs clearly have no ways of directing prices into their favor.
Security. Hosting DEXs is often done in a distributed manner to prevent attacks. Moreover, hackers can only interact with liquidity pools on a trading platform and not with the users that interact with the exchange.
Token accessibility. Thanks to their decentralized nature, everyone can list an asset on DEXs without having to rely on a vouching or verification system operated by the platform’s owners.
Liquidity limitations. Centralized exchanges also depend on liquidity provided by their users, but not to the degree of reliance that decentralized exchanges have. DEXs traditionally have no liquidity pools on their own, so they must be filled by yield farmers who contribute their assets for other traders to use. Without them, the exchange cannot offer trading services.
Speed. Less efficient order execution compared to their counterpart, which is mainly brought on by the traditional lack of advanced trading tools.
Volume and slippage. DEXs have picked up on volume, but without an order book and market maker, users suffer extreme slippage rates - especially with large orders.
Fees. No order book also means no low fees. All users pay a fixed trading fee, along with gas fees charged by the Ethereum network. When congested, the network charges hundreds of dollars for a single transaction.
Decentralized exchanges vs centralized exchanges
Which one should you choose: decentralized or centralized exchanges? Our previous section regarding the pros and cons of a DEX should shed some light on the question, but there are other factors that need to be discussed.
Like it or not, user experience is the primary determinator of crypto adoption. Veteran investors who traded Bitcoin for years were baffled by the entrance of DEXs like Uniswap, spending dubious amounts of time learning how the platform works.
Now imagine how hard it is to learn to use a DEX by a complete beginner who never set foot on the crypto market. Simply put, user experience is a critical factor that decides whether DEXs suit you better than CEXs.
Are you willing to spend extra time and money solely to support decentralization? Exchanges like Binance, Kraken, and Coinbase bring their own set of headaches as well, but their flaws are perhaps not that bad.
Ultimately, the argument between DEXs and CEXs is completely subjective - especially when one considers the current development state of decentralized exchanges. We cannot recommend one over the other; you will have to pick the lesser of two evils based on your personal needs and requirements.
Top 5 decentralized exchanges
Everyone has their favorite DEX, and within the rapidly evolving DeFi market, there are many options to choose from. Is there a perfect decentralized exchange? Certainly not, but that does not mean that we cannot help you.
Are you in need of our special insight? We offer you a list of the top 5 decentralized exchanges based on their popularity and performance. Since tastes differ and every trader seeks something different, one option is not necessarily better than the other.
Uniswap has a perfect track record in the DEX market, and we can safely say that it is the ‘King of DeFi.’ Although the platform had its ups and downs in the past, there is nothing that beats its simplicity and vast liquidity.
Led by stalwart Ethereum supporter Hayden Adams, Uniswap is a decentralized exchange operating with its own model for an AMM. The platform’s ownership is regulated by a governance model in which users express their voting rights with the native UNI governance token.
The UNI token was massively distributed through an airdrop last fall as a special approach towards ensuring decentralization. All users who have previously used the exchange to trade have received this token.
In terms of trading technicalities, Uniswap charges a 0.3% trading fee on every token swap. Yield farmers receive a portion of the exchange’s fees based on their contribution. All liquidity pools have a 1:1 token basis which must be respected at all times.
At the time of writing, Uniswap hosts $3.71 billion in collateralized assets and is ranked second on the Coingecko DEX leaderboard.
The notorious SushiSwap DEX hides a controversial history that eventually turned into a redemption arc. Here is why:
In late August, an anonymous developer named Chef Nomi forked the Uniswap project and created SushiSwap. Since Uniswap did not have a token at the time, Nomi decided to create a DEX that rewards yield farmers with both token swap fees and a native governance token.
The decision created a spark that resulted in massive liquidity migrations from one project to another. But Chef Nomi’s controversial ownership over developer funds led to a drama that temporarily killed the DEX for a few months.
SushiSwap is in good hands now, as it is operated by a team of faithful developers that turned the DEX into an original project with revolutionary features. Today, the exchange once again directly competes with Uniswap, hosting $3.06 billion in collateralized assets. Ranked fifth on Coingecko’s leaderboard, the trading platform is only a couple of places behind its main rival.
SushiSwap is a DEX for those who are bullish on the SUSHI token and the future of the Yearn Finance ecosystem. SushiSwap sort of became a part of the Yearn movement in December after the two dev teams announced a merger.
Why pick SushiSwap? If you want diverse yield farming opportunities and DEX features that go beyond simple token swapping and farming, SUSHI is definitely the best option.
Not a fan of SushiSwap nor Uniswap? You might have a better experience trading on the 1Inch Exchange. The special feature of this project is that it is a DEX aggregator, rather than a standard DEX.
Essentially, 1Inch collects liquidity across a vast array of liquidity pools, trading platforms, and decentralized exchanges to find the best rate and most efficient trade possible. By utilizing capital from the entire DeFi market, 1Inch does a great job of lowering fees and slippage. Even better, traders that use the Chi Gastoken spend between 40% to 50% less on gas fees.
1Inch has also integrated Nexus Mutual, so users can purchase coverage insurance for their DeFi activities. Their users also have access to an active governance model and a variety of profitable yield farming strategies.
There are no good comments left for Ethereum when traders have to pay hundreds of dollars on transactions. For those who want to try something different, they might as well switch to a decentralized exchange from an entirely different blockchain network.
PancakeSwap is a DEX built on the Binance Smart Chain that is a clone of Uniswap, but for the world of BEP-20 tokens and dApps. It is operated by anonymous developers, but users control the project in a decentralized fashion by voting with the CAKE governance token.
PancakeSwap charges a 0.2% fee on all token swaps. 0.17% is distributed to liquidity providers while the project’s treasury burns the remaining 0.03%. It is worth noting that yield farmers receive both fees and LP tokens as rewards.
PancakeSwap was practically a ‘nobody’ in the DeFi market, but the project suddenly gained fame in 2021 following Ethereum’s fiasco with fees. At the time of writing, PancakeSwap is the third leading decentralized exchange with a trading volume of $763 million.
Again, you might fare better on a DEX hosted on BSC if you care for gas fees. Otherwise, it would be wise to stay away from BSC’s notorious ecosystem.
Going back to Ethereum, Bancor is a reputable liquidity protocol that pioneered the DeFi market since its early days. Operated by the Swiss-based Bancor Foundation, the ‘Bancor Network’ is a successful token swapping and yield farming platform powered by the native BNT token.
The neat thing about Bancor is that its AMM does not enforce the standard 1:1 basis for providing liquidity. Specifically, the platform does not require that you provide equal portions of two tokens in a liquidity pool. You can safely deposit either ETH or DAI in a ETH/DAI liquidity pool. In comparison, Uniswap forces you to deposit both assets if you want to yield farm.
Bancor also hosts its own liquidity protection feature, akin to coverage insurance. Traders can protect their DeFi adventures by staking certain assets.
And just like all other DEXs in this list, Bancor has a governance model as well. However, it is not that active compared to projects like Yearn Finance, considering that there are only a few ‘serious’ governance discussions per week.
Data provided by DeFi Pulse reveals that Bancor hosts $844 million in collateralized assets. It is ranked 14th on the Coingecko DEX leaderboard.
Decentralized exchanges are, in theory, the perfect exchanges. They delegate all rights and ownership to the community, and all processes are entirely carried out by smart contracts. Moreover, their non-custodial aspect provides a safe space for fervorous crypto enthusiasts who believe in the ‘not your keys, not your coins’ adage.
In an ideal world, decentralized exchanges would be the only kinds of trading platforms in not only crypto but in other markets as well. However, their absurd limitations prevent them from becoming such a dominant force.
Protecting decentralization at all costs is a valiant effort, but when it comes to sitting down and trading, such abstract ideas have no place in our minds. Since Ethereum powers DeFi, DEX users have to pay abnormal fees that are found on no other CEX. Knowing that decentralized exchanges often do not offer advanced trading tools, there is one less reason to use them.
If you want to invest in a token that is otherwise not found outside DeFi, using DEXs is fine. Nevertheless, we urge users interested in exclusively depending on DEXs to carefully analyze their pros and cons.
Our list of the 5 best decentralized exchanges in 2021 features Uniswap, SushiSwap, 1Inch Exchange, PancakeSwap, and Bancor. Let us know in the comments below if there is a special DEX that deserves to be praised.
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