Crypto Investing

Best Decentralized Crypto Exchanges

Image Credit: Just_Super on iStock Traditional finance can be boring. Here’s a fun-sized description of how it works: You cannot send money from, let’s say, Chicago, to a place like Tokyo (or within the same country for that matter) without the bank acting as a go-between. The bank receives your request for money transfer, and […]

CryptoFortress

Aug 7, 2024 - 20:05

Image Credit: Just_Super on iStock

Traditional finance can be boring. Here’s a fun-sized description of how it works:

You cannot send money from, let’s say, Chicago, to a place like Tokyo (or within the same country for that matter) without the bank acting as a go-between. The bank receives your request for money transfer, and does checks and balances before shipping your bucks off to the other end of the world.

The presence of this centralized intermediary (the bank), results in some serious fees for money transfer and, in the age of IMF, trade agreements, and monetary policies, you can only move money to Tokyo if the Japanese government has a kind of MoU with the U.S.

The architecture of the contemporary monetary system can be this limiting around the globe. But just imagine a system where the bank is not needed and you can directly move money off to any part of the world. No restrictions, no hidden fees, and no delays.

This is what decentralized exchanges come in. By removing middlemen, DEX are reobutionary. Here we will have a look at the best decentralized exchanges out there.

How the Exchanges Were Selected

Our selection of top decentralized exchanges was based on the evaluation of various factors, important factors, including:

Security measures and reputation
User interface and experience
Trading volume and liquidity
Supported cryptocurrencies and assets
Fees and pricing structures
Regulatory compliance and adherence to industry standards

We considered both popular and up-and-coming DEXs, we accessed their unique features, strengths, and weaknesses. Our goal was to provide a well-rounded selection of DEXs that cater to diverse user needs and preferences.

Introduction to Decentralized Exchanges (DEXs)

What is a Decentralized Exchange?

Decentralized exchanges, also called DEX, are cryptocurrency marketplaces that facilitate peer-to-peer transactions between crypto traders, without the need of an intermediary. These transactions are made possible by smart contracts, which are self-executing instructions programmed into the computer.

With DEX, traders don’t need to hand their funds to an intermediary because these exchanges are noncustodial —which means that users are in control of their funds and their private keys. These private keys are alphanumeric codes that allow users to prove ownership of their blockchain assets, and to run other transactions.

The idea is a system of money where the user is completely in charge, and algorithms (smart contracts) are relied on to execute transactions authorized by users at both ends.

Centralized vs. Decentralized Exchanges

Decentralized exchanges are remarkably different from traditional centralized exchange.

The foremost example of a centralized exchange is the bank. Their mode of operation requires the user to complete Know Your Customer (KYC) verifications, deposite their funds into the bank, and, if need be, request the bank to transfer money to another user who have also gone through the same process.

But centralization also exist in the crypto space, as there are exchanges that also require users to go through a similar process required by the bank. These are called centralized crypto exchanges. They are the banks of the digital currency age; they are similar to banks, but different from decentralized exchanges.

Centralized crypto exchanges require users to complete KYC verification, they serve as custodians of users’ funds, and are in charge of the private keys of their users. This

The Advantages of Decentralized Exchanges

Having Custody of Assets

Users of decentralized exchanges have custody of their digital assets, and do not need to transfer them to an entity. Because, unlike centralized exchanges, DEX don’t have control of user funds, users are tasked with guarding their funds, and can only interact with the exchange at their own time; this way, there is a reduce risk of loss from hack, theft, or fraud.

Privacy and Data Protection

Centralized exchanges mandate users to go through KYC verification, which entail giving your data to the exchange, including your name, DOB, address and government issued ID among others.

Things are different with decentralized exchanges. The decentralized nature of DEXa means there is no central authority, there is no need for KYC verification. This keeps users anonymous, and gives them privacy when they’re trade on decentralized exchanges.

Security and Transparency

DEX have something to offer in terms of security. They operate on the blockchain, which ensures a secure, transparent, and immutable decentralized trading environment. Blockchain technology, which powers these DEXs, is a decentralized, distributed ledger that records all transactions, making it difficult for a single entity to manipulate or alter the data.

The transparency of the blockchain also allows users to view all transactions and trades in real-time, providing a high level of accountability and trust in the system. This ensures that all trades are fair and secure, and that users can trust the decentralized exchange to operate honestly and transparently.

Decentralized Governance and Open-Source Code

Owing to their lack of a centralization, decentralized exchanges are governed by a community of users, rather than a central authority. This decentralized governance model ensures that decision-making is distributed and community-driven, rather than being controlled by a single entity.

The open-source code of decentralized exchanges also allows developers to review and contribute to the codebase, ensuring that the exchange is constantly improving and evolving. This community-driven approach to development ensures that the exchange is secure, transparent, and meets the needs of its users.

Trading and Global Accessibility

You can trade on many decentralized exchanges at any time and from any location, since they operate 24/7. This provides users with flexibility and convenience, as they can trade on their own schedule and from anywhere in the world.

The global accessibility of decentralized exchanges also ensures that users from all over the world can participate in the market, regardless of their location or time zone. This provides a truly global trading experience, and allows users to connect with other experienced traders from around the world.

Risks and Limitations of Decentralized Exchanges

Decentralized exchanges are not without their limitations. Here are a few of them:

Lack of Regulation and Oversight

Decentralized exchanges operate outside of traditional regulatory frameworks, which can make it difficult for users to find solution in the event of a dispute or fraud. This lack of oversight can also make it easier for illegal activities, such as money laundering or terrorist financing, to occur on the platform.

Technical Complexity

Compared to centralized exchanges, DEXs can be technically complex, which can make it difficult for new users to understand how to use the platform. This can include complex wallet setup, confusing user interfaces, and difficult-to-understand smart contracts.

Limited Liquidity

Decentralised exchanges often have limited liquidity, which can make it difficult for users to buy and sell assets quickly and at a fair price. This can be particularly problematic for users who need to exit a position quickly, such as in the event of a market downturn.

Limited User Suppor

Due to their decentralized structure, these decentralized exchanges often have limited user support, which can make it difficult for users to get help when they need it. This can include long response times, unhelpful support staff, and limited resources for troubleshooting and resolving issues.

The Top Decentralized Crypto Exchanges

Uniswap

Image Credit: iQwiki

Uniswap is the world’s largest decentralized exchange by volume traded. They allow users to trade cryptocurrencies without a central third party. Uniswap has its own blockchain that is hosted on the Ethereum platform, and because of this, Uniswap only allows ERC-20 tokens.

As a decentralized exchange, anyone is allowed to use Uniswap, its permissionless design makes getting started on the platform as simple as plugging in your own Ethereum wallet, then you can buy or sell tokens, swap and trade cryptos, or become liquidity providers, to generate yield. Transactions are made possible by smart contracts.

By being very popular, Uniswap provides enough liquidity to accommodate the transaction of users. More than this, Uniswap is open source, as anybody can contribute the blockchain’s code; it is one of the most trusted decentralized exchanges.

Despite its wins, there are drawbacks with Uniswap, and chief among them is that users are limited to cryptocurrencies that are compatible with Ethereum, and they must have ETH to pay for transaction processing fees.

Jupiter

Image by author

Jupiter is a unique decentralized exchange. It is a DEX aggregator, meaning that it combines multiple decentralized exchanges into a single interface, thereby providing users access to more options and liquidity.

Launched in 2021, Jupiter came as a response to the problem of fragmented liquidity. Rather than a reliance on one liquidity pool spread across different exchanges —which can lead to slippages and high volatility, aggregators like Jupiter provide users a single interface that gives them access to multiple liquidity pools for a given cryptocurrency.

This does not only mean more liquidity for user trades, it also means that user get the best prices, as they can leverage slight price differences in price that may exist between exchanges, all of which they have access to on Jupiter.

As a decentralized exchange, Jupiter offer users the same upsides as every DEX, including anonymity and improved security, among others.

Another benefit of Jupiter is that, by allowing users to optimize grease across many exchanges, Jupiter helps them reduce the fees involved in crypto transactions.

Raydium

Image Credit: iQ wiki

Raydium was built as a solution to problems inherent in the Ethereum network and those DEX built with Ethereum as their underlying blockchain network. These problems include slow transactions and high gas fees.

It is a decentralized exchange built on the Solana network, notable for fast transactions and high throughput, trades and token swaps on Raydium arem executed more instantaneously and at a lower cost.

Raydium is also designed to combat the problem of low liquidity, but it solves this problem differently from aggregators. Rather than bringing many exchanges in a single place as a way to provide more liquidity, Raydium is designed to be providing liquidity by allowing users to become liquify providers —they stake their digital assets in liquidity pools, and reward them with tokens for doing so.

Raydium has a low fee structure. With only 0.25% trading fee, they offer low fees compared to what is attainable on other exchanges. Additionally, Raydium also offers users an impressive list of over 200 different token to invest and trade.

A key drawback of the Raydium decentralized exchange is that since it’s built on the Solana network, users must have a Solana wallet to use it.

1inch

Image credit: Zenledger

This is an aggregator platform like Jupiter. They aggregate decentralized exchanges into a single interface. 1inch is known for providing low rates for users, and they achieve this by checking the rates of its aggregated exchanges.

You can buy tokens on 1inch using your credit/debit card, or through Moonpay. And the platform supports a wide range of blockchains, like Binance Smart Chain (BSN), Polygon (MATIC), Ethereum (ETH), OP Mainnet (Optimism), Fantom (FTM), Arbitrum (ARB), and Base. L

On these blochains they allow the swapping on BEP-20 and ERC-20 tokens, and a much longer list of cryptocurrencies for trading.

1inch also allows users to provide liquidity. You can lock in your asset in a pool and earn 1INCH, the utility token of 1inch, as interest.

Just like most DEX, platforms like 1inch are not beginner-friendly, as they provide an interface that beginners can find complicated.

PancakeSwap

Image credit: iQ Wiki

PancakeSwap is a decentralized exchange built on the Binance Smart Chain. It is akin to Uniswap, but while Uniswap allows only ERC-20 tokens, PancakeSwap, because it’s built on the BSC network, allows only BSC-20 tokens.

On PancakeSwap you can buy, sell, and trade crypto assets. The platform also has a utility token, CAKE, which it uses to incentivize users to become liquidity providers by locking their digital assets in liquidity pools.

Because the Binance Smart Chain has lower fees than most blockchains, PancakeSwap boasts of low trading fees —as low as 0.25% on spot trading.

PancakeSwap is considered one of the most secure decentralized exchange, as it has security audit tests from companies such as Slowmist.

However, it is a downside that this exchange supports only the Binance Smart Chain blockchain. And the exchanges has been accused of being more centralized compared to other decentralized exchanges.

dYdX

Image Credit: dYdX on LinkedIn

dYdX is a decentralized exchange that is focused on lending services, and more advanced trading, like margin and derivative trading. They also offer nonfungible token (NFT) collection, which it uses for community-building.

Founded in 2017, dYdX is among the biggest decentralized exchanges by volume traded. Though it started as a secure platform for perpetual and derivative trading, the platform quickly evolved to also provide spot trading for users.

This exchange charge very low fees for trading, as low as 0.05% for trade, and it achieves this by partnering with the Ethereum layer 2 scaling solution Starkware.

Perpetual and margin trading are more risky compared to spot trading, and since the platform is maximized for the former, it might not be friendly for beginners in the crypto space.

SushiSwap

Image Credit: Zipmex

SushiSwap was established in 2020. The exchange currently offers 408 trading pairs and 319 coins.

SushiSwap facilitates the buying and selling of cryptocurrencies among users, with liquids provided by users who lock their digital assets, earning SUSHI as reward.

Beyond decentralized trading, SushiSwap also provides borrowing and lending services to users.

Osmosis

Image Credit: Coinacademy

This DEX is a cross-chain platform built on the Cosmos blockchain. Osmosis supports trades from multiple chains, including Cosmos, Ethereum, and Binance Smart Chain.

On Osmosis you can buy, sell, and trade crypto assets, as well as take advantage of other features like liquidity pools and decentralized governance. The platform also has a utility token, OSMO, which it uses to incentivize users to provide liquidity and participate in governance.

Osmosis boasts smooth user interface, fast transaction time, and low trading fees – as low as 0.2% on spot trading.

How to Choose a Decentralized Exchange

When choosing a decentralized exchange (DEX), there are factors that are worth considering, to make sure you get the best decentralized exchanges the market has to offer.

Some of the factors are chain liquidity, user interface, transaction fees, and security measures, among others.

Research and compare the different options out there; read user reviews, and prioritize your trading needs to make an informed decision.

Factors to Consider When Selecting a DEX

As pointed out above, their are factors that are worth considering when you’re choosing a decentralized exchange.

Here is a list of them:

Chain Liquidity

Chain liquidy is the backbone of crypto transactions. Centralized platforms have more of them, while decentralized exchanges typically have lower liquidity.

When choosing a decentralized exchange (DEX), it’s important to consider the chain liquidity. Chain liquidity refers to the amount of assets available for trading on the blockchain network. A DEX with high chain liquidity makes it easier for users to buy and sell assets with reduced price slippage.

DEXs that support multiple blockchain networks and have a high trading volume tend to ensure sufficient chain liquidity.

User Interface

The user interface of a DEX makes an undeniable difference in the overall trading experience.

A user-friendly interface can make it easy to navigate the platform, find trading pairs, and execute trades. But a complex and cluttered interface can lead to confusion and mistakes.

When choosing a DEX, those with an intuitive user-interface and responsive interface should weigh more than those that don’t.

Transaction Fees

Transaction fees are another important factor to consider when selecting a DEX.

Fees vary between exchanges, and a little too much fees can eat into your trading profits. Look for a DEX that offers competitive transaction fees, and consider the fee structure, including maker and taker fees, withdrawal fees, and any additional charges.

Security Measures

A DEX with robust security measures can protect your assets from hacking and theft.

When making a choice on which DEX to use, look for platforms that have implemented measures such as multi-signature wallets, cold storage, and two-factor authentication.

Additionally, consider the exchange’s track record, reputation, and user reviews to ensure it has a strong security posture.

Getting Started with Decentralized Exchanges

How to Get Started with a Decentralized Wallet

Getting started with a decentralized wallet is a straightforward process that can be completed in a few steps:

1. Choose a decentralized wallet: Your choice should be a product of proper research. This will help you select a reputable decentralized wallet that aligns with your needs.

2. Download and install the wallet: Download the wallet’s software or app from the official website or the app store of your smartphone’s operating system. Then follow the installation instructions.

3. Create a new wallet: Open the wallet software or app and create a new wallet by following the prompts provided. This will typically involve generating a seed phrase or private key.

4. Secure your seed phrase: Store your seed phrase or private key in a safe and secure location, such as a hardware wallet or a physical note. This is very important, as proper handling of your seed phrase can guarantee the safety of your funds.

5. Set up your wallet: Configure your wallet settings, such as setting a password or enabling two-factor authentication.

6. Fund your wallet: Transfer cryptocurrencies from an exchange or another wallet to your decentralized wallet.

7. Explore and use your wallet: Familiarize yourself with the wallet’s features and start using it to store, send, and receive cryptocurrencies.

Step-by-Step Guide to Making Your First Trade

The steps involved in placing trades can be different across platforms, but here is a general step-by-step guide for making your first trade on a decentralized exchange (DEX):

Step 1: Prepare Your Wallet

Make sure you have a decentralized wallet set up and funded with the cryptocurrency you want to trade.
Ensure you have sufficient funds to cover the trade amount and any fees.

Step 2: Choose a Decentralized Exchange (DEX)

Select a reputable DEX that supports the cryptocurrency you want to trade.
Ensure the DEX has sufficient liquidity and a good reputation.

Step 3: Connect Your Wallet to the DEX

Follow the DEX’s instructions to connect your wallet to the platform.
This may involve generating a wallet address or linking your wallet through a browser extension.

Step 4: Select Your Trading Pair

Choose the cryptocurrency pair you want to trade (e.g., ETH/USDT).
Ensure the DEX supports this trading pair.

Step 5: Set Your Trade Parameters

Determine the amount of cryptocurrency you want to buy or sell.
Set your desired price (optional) or choose to trade at the current market price.

Step 6: Execute Your Trade

Click the “Buy” or “Sell” button to execute your trade.
Confirm the details of your trade before submitting.

Step 7: Monitor Your Trade

Keep an eye on your trade’s status and any updates.
Be prepared to adjust your trade or close it if necessary.

Step 8: Withdraw Your Funds (Optional)

If you’ve sold cryptocurrency, you may want to withdraw your funds to your wallet.
Follow the DEX’s instructions to withdraw your funds.

Legal and Regulatory Considerations

Are Decentralized Exchanges Legal in the US?

Decentralized exchanges are legal in the U.S., though their legal status varies across the U.S, with some exchanges banned in certain states like New York, and others under scrutiny by regulators like the SEC for compliance, transparency, and investor relations.

Do Decentralized Exchanges Report to the IRS?

DEXs are not required to report user transactions to the Internal Revenue Service (IRS) like centralized exchanges do. However, this may change as regulations evolve.

Conclusion

There are two major types of exchanges in the crypto space, traditional centralized and decentralized exchanges. In this piece we looked at what decentralized exchanges are and, considering crucial factors that characterize DEX, we outlined our list of popular decentralized exchanges.

There may not be an overall best exchange, as each has its own strength and weakness. The idea, however, is that you will know the factors to look out for when you’re researching the decentralized exchanges to get in on.

Future Trends in Decentralized Exchanges

Cryptocurrencies, blockchain technology, Decentralized Finance (DeFi), and decentralized exchanges are still relatively new technologies. This means there are lots of work we expect to go on in this space in the near future.

For decentralized exchanges, projections are Lesmes towards increased adoption. The more value these exchanges provide, the more people will learn about them, and come to use them.

But this is not all, as the technology gets better, the interface of these exchanges are expected to be a user-friendly interface, with improved user-experience.

Other expected trends are layer 2 solution, more DeFi Integration, cross-chain compatibility, community-driven development, and more compliance with regulations.

DEXs will prioritize decentralization, security, and user experience, thereby driving innovation and adoption in cryptocurrency and Decentralized Finance.