12. Decentralized Exchanges (DEXs)

Monday 21st February 2022

A DEX doesn't require KYC completion. You can connect using your wallet (e.g. Metamask) and swap / trade crypto. The crypto remains in your wallet.

There are 2 easy ways to trade crypto - Centralized Exchanges (CEX) and Decentralized Exchanges (DEX).

A CEX requires users to complete a KYC process. It authenticates you using your username, password, and email / SMS OTP (one time password). Once you are logged into your account, you can transfer fiat (rupees, dollars, etc.) to your account and use it to buy crypto. Similarly, you can sell the crypto and get the fiat into your bank account.

Remember that in a CEX, the crypto is not in your “wallet”. It’s in the exchange’s wallet.

A DEX, on the other hand, doesn’t require KYC completion. You can connect using your wallet (e.g. Metamask) and swap / trade crypto. The crypto remains in your wallet.

The top 5 DEXs and their TVL (Total Value Locked) as of 15 Feb 2022 are:

  • Curve (CRV): $19.81 billion
  • Uniswap (UNI): $7.78 billion
  • SushiSwap (SUSHI): $4.79 billion
  • PancakeSwap (CAKE): $4.78 billion
  • Balancer (BAL): $3.36 billion

1. Curve (CRV)

Curve (CRV) is a decentralized exchange liquidity pool on Ethereum. It is specially designed for:

  • extremely efficient, low slippage stablecoin trading, and
  • low risk, fee income for liquidity providers.

Slippage is the difference between the expected price of a trade and the price at which the trade is executed.

The fees and other parameters are decided by the Curve Decentralised Autonomous Organization (DAO). The fee on all the pools is 0.04%. Half of the fee goes to the liquidity providers and the other half to the members of the DAO.

2. Uniswap (UNI)

Uniswap (UNI) is a decentralized protocol for automated liquidity provision on Ethereum.

One major problem with illiquid assets on regular exchanges is “high spreads”. Uniswap solves this problem by enabling everyone to become a market maker.

Uniswap suffers from high slippage for large orders because the price paid increases with the increase in the quantity.

3. SushiSwap (SUSHI)

SushiSwap (SUSHI) is a decentralized protocol for providing automated liquidity on Ethereum. It is a decentralized exchange and a decentralized lending market. It also enables yield instruments and staking derivatives.

In late 2020, Yearn.finance and SushiSwap announced a merger under which they would share development resources, but maintain separate tokens and governance systems.

4. PancakeSwap (CAKE)

PancakeSwap (CAKE) is an automated market maker and yield farm on the Binance Smart Chain (BSC). Although PancakeSwap is a fork of SushiSwap, it enables cheaper and faster transactions because it runs on BSC.

PancakeSwap also provides yield farming, lotteries, and initial farm offerings.

5. Balancer (BAL)

Balancer (BAL) is a non-custodial automated portfolio manager and trading platform. In a conventional index fund, the investor pays fees to a portfolio manager for rebalancing the portfolio.

In Balancer, the investor collects fees from traders who rebalance their portfolio by following arbitrage opportunities.