With significant improvements in crypto volume, Defi exchange development has become a key element in the crypto world today. In the year between June 2020 and June 2021, decentralized finance exchanges processed almost $600 billion worth of trades.
The trade volume of the Defi crypto exchanges are keep going on with every passing day. In the last two years, the Defi exchange platform rose to become a force in improving trade volume.
In this blog, we will unlock the promising types of DEXs. So let us get started!
What is a Decentralized Exchange?
The first thing you look for in a guide to DEXs would be the meaning of a decentralized exchange. Essentially, DEXs are peer-to-peer marketplaces where cryptocurrency traders can conduct direct transactions. Decentralized exchanges are remarkable for not transferring the responsibility for managing your funds to custodians or intermediaries. Using smart contracts, which are self-executing code agreements, DEXs can ensure transactions.
Decentralized exchange eliminates the need for any authority for supervision of transactions. It links crypto buyers and sellers with the help of DEXs peer-to-peer or P2P cryptocurrency trading by linking crypto buyers and sellers together.
DEXs exchanges offer ownership to the users through private keys, as it is non-custodial. These advantages add value to the popularity of the DEXs. For a comprehensive understanding of the implications of decentralized exchange development, it is also important to identify the roots of decentralized exchange development.
How Do DEXs Work?
Since decentralized exchanges use blockchain networks to support smart contracts where users keep custody of their funds. Every trade involves a transaction fee along with the trading fee. Moreover, traders use smart contracts on the blockchain to trade in DEXs.
Similar to centralized exchanges, the first decentralized exchanges were used to order books. The decentralized exchange has three main types. These types facilitate users to trade directly through smart contracts.
Unlocking Different DEXs
There are different decentralized exchanges with few differences in their functions. Some of them are listed below:
– Automated market maker
Using smart contracts, automated market makers operate DEXs. These smart contracts hold the liquidity pool in a paired fashion. This DEX collects liquidity from the liquidity providers (LPs) who deposit their assets to the pool. In return, they avail certain benefits from the exchange.
Liquidity pools allow traders to execute orders and earn interest, requiring no permission or trust. As the AMM model has a downside when there is not enough liquidity: slippage, these exchanges are often ranked based on how much value we lock in their smart contracts called total value locked (TVL).
– Order Book DEX
Now coming to the next type. The order book is another type of DEX with a leading track record of open orders for purchasing and selling assets. Here, traders can offer or ask for their best price for an asset, which may or may not be filled based on the level of market liquidity. It shows that order book DEX offers more complex order types, not possible in AMMs such as including limit, take profit, and stop-loss orders.
An order book is specifically designed for those looking for a more traditional exchange experience. There is one drawback of an order book: it has to suffer from liquidity issues. Now have a look at some of the well-known border book base DEX platforms:
-
- Ethereum: dYdX and IDEX
- Solana: Serum
- Avalanche: Dexalot
– Reserve System DEXs
The reserve system (RS) DEXs have similar functions to AMM DEXs, with a small difference. Smart contracts adjust the price automatically because AMM DEX is algorithmically driven. It also promises liquidity stability for the market makers to prevent market manipulation. That’s because the AMM DEXs are prone to impermanent loss (IP) due to price fluctuation. It shows when large transactions happen on the DEX; the slippage is very high.
To overcome this, they introduced Reserve Systems. The Reserves are various liquidity providers or market makers who support the ERC-20 standard. They have their own rules to control the prices of the assets. Because of this, they can enable risk management. For example, they help set low slippage when the transaction is significant.
– Benefits of using DEXs
Defi crypto exchanges are an enticing opportunity for traders. Let’s have a look at some of the exciting features of using Defi crypto exchanges.
-
- Tokens availability
- Anonymity
- Lower counterparty risk
- Improved security
– Risks Associated with DEXs
-
- It required specific knowledge about security concerns to secure digital assets.
-
- Unverified token listing risk because investors invest in the tokens to provide liquidity options, which sometimes leads to a scam if not verified properly.
-
- Smart contracts can sometimes cause risk because of the occurrence of bugs.
Final Thought
Soon after the inception of the first decentralized exchange, it started getting huge popularity. With the advanced solutions of DEX, users can also earn passive income, as well.
It takes expertise and experience to create a crypto exchange platform that offers high-performance, top-notch security, and a trustless environment for users. Hire Hashlogics to kick-start Defi exchange platform development now.
