Trading cryptocurrency in 2020 looks very different than it did 12 months ago. In the past year, decentralized exchanges (DEXs) have actualized their potential, and the crypto space has taken note. Most DEXs have low trade volume when pitted against their biggest centralized competitors, but their emergence marks a critical step in the creation of a sustainable decentralized finance (DeFi) ecosystem. These exchanges accounted for $2.3 billion of trading volume in 2019, a number that was easily surpassed in the first five months of 2020. In the past 30 days alone, over $1 billion has been traded on them.
It’s no mystery why some traders prefer DEXs. First of all, they are non-custodial: a DEX does not control your funds or private key like traditional, centralized exchanges. Furthermore, decentralized exchanges don’t require users to submit KYC (“know your customer”) information such as legal name, passport number and email address. This is particularly appealing for those who don’t want to share critical information with potentially untrustworthy parties.
Of course, DEXs have drawbacks. High trading fees prove costly over time and make small trades unviable when the network is congested. Furthermore, DEXs don’t have the slick user interface (UI) most traders are accustomed to: there are no visible trading candles, no stop-losses, no order books. This makes trading on a DEX more treacherous than traditional cryptocurrency exchanges since users cannot practice risk management as easily. Right now, decentralized exchanges teeter between mainstream and obscure, popular with some but not user-friendly enough for most. Developers have been working hard to resolve their shortcomings, but until then we’re left with a relatively compact but vital group of decentralized exchanges. Without further ado, here’s our list of the top decentralized exchanges for traders.
Uniswap is, without a doubt, the most popular decentralized exchange, and it’s difficult to understate its impact on DeFi. One year ago, Uniswap was an afterthought in the emerging Ethereum DeFi ecosystem; now, it’s at the center of it. Uniswap was created in November 2018, but didn’t reach a critical mass of users until Uniswap V2 released in May 2020. As of today, Uniswap has the most total value locked (TVL) of any DeFi protocol, reaching over USD $3 billion in early November. So, how did they do it?
Uniswap solves the most pressing issue for any decentralized exchange: liquidity. When there’s little to no liquidity, traders subject themselves to large price swings and spreads. Uniswap partly resolves the issue with its liquidity pools. Any ERC20 token can be listed on Uniswap, and each token has its own smart contract and pool. No permission is required to list a token, and any user can add liquidity at a ratio of 50:50 (for instance, 50% ETH and 50% DAI for the ETH-DAI pool). This makes Uniswap an ideal platform for launching new projects, but also a haven for scammers.
Uniswap is an Automated Market Maker (AMM) that uses a simple algorithm to establish token price: x * y = k. In this equation, x represents the amount of ETH in the pool, y represents the number of tokens, and k remains constant. When ETH is used to buy the token, x goes up, y goes down, and the token price increases. This solution allows Uniswap to establish a token’s price regardless of demand. Unlike traditional exchanges, users do not submit a price they want to buy or sell at. Uniswap effectively acts like spot markets in which traders can only buy and sell at the current price in real-time.
Uniswap represents a radical departure from the status quo of crypto trading. For all of its innovations, however, Uniswap still lacks basic trading tools like stop-losses and order books. Many ‘layer-2’ solutions are being developed to fix its shortcomings, but none have managed to capture the larger market yet. Uniswap earns the top spot because it has the largest volume, number of trading pairs and TVL.
TLV of DEXs
Despite Uniswap’s popularity, low liquidity continues to be a huge hurdle. Low liquidity means high price volatility and slippage (the difference between the expected trade price and the executed trade price). Liquidity has also been scattered across multiple exchanges, exacerbating the problem. 1inch is a DEX aggregator that addresses this problem. By rolling together multiple DEXs into one trading platform, 1inch unlocks liquidity, routes your trade, and finds the best price for you.
Trades on 1inch can even be split into multiple parts or across multiple exchanges. 1inch currently features about a dozen exchanges including Uniswap, Balancer and Oasis. DEX aggregators are great tools for reducing slippage, but users will often experience high trading fees (gas fees) due to the complexity of the trade. 1inch primarily helps traders by saving them time since they don’t have to manually search each exchange for the best rates. DEX aggregators like 1inch and 0x Protocol are great weapons in any DeFi trader’s arsenal.
Balancer plays an important, albeit slightly different, role in the DeFi ecosystem. Like Uniswap, Balancer is an AMM that allows users to swap ERC20 tokens. What differentiates Balancer, however, is its use as a portfolio management tool. As its name suggests, Balancer balances assets in a liquidity pool based on a given ratio. Let’s say that you want a portfolio that’s 60% ETH and 40% DAI, if the price of ETH goes up, Balancer will automatically sell your ETH and buy DAI to keep the portfolio at an even 60:40 split. Users can create their own portfolio and choose their desired ratio, or they can join a preexisting liquidity pool, receiving BAL tokens as a reward for their contribution.
Balancer plays an essential role in some hugely successful DeFi projects, mostly because of its reliability, usability and flexibility. Uniswap’s liquidity pools are always kept at a 50:50 ratio, but Balancer allows liquidity providers to choose any ratio (such as 98:2). Consequently, many liquidity mining platforms prefer Balancer to Uniswap because it reduces the risk of impermanent loss. Although its popularity has sunk of late, Balancer still has one of the highest trade volumes of any decentralized exchange.
Back in August 2020, anonymous developer Chef Nomi released his Uniswap fork, SushiSwap. The platform gained popularity by copying Uniswap’s AMM and adding liquidity mining. Liquidity miners pounced on the opportunity because of SushiSwap’s superior returns, but the hype train ended up being short-lived: Chef Nomi cashed out 37,000 ETH (USD $13 million), causing an enormous controversy in the DeFi space and branding SushiSwap as yet another “exit scam.”
Despite the abdication of its creator, SushiSwap has thrived as a community-governed decentralized exchange. The biggest DeFi migration ever took place in September 2020 when SushiSwap moved USD $830 million in assets from Uniswap to its native platform. SushiSwap earns its spot by replicating Uniswap’s success and controlling the second-highest volume among all DEXs. The key difference between Uniswap and SushiSwap is the latter’s greater number of mining pools, which continue to drive liquidity providers to the platform. Although it doesn't have as many offerings as Uniswap, SushiSwap is a dream for any liquidity provider.
Matcha is another DEX aggregator, based on the 0x protocol. Competition is pretty fierce for DEX aggregators, but Matcha separates itself from the pack because of its wonderful user interface. When searching for a token you will see a price chart, your recent transactions, and market updates. It’s a clever and useful solution to some of the biggest problems plaguing decentralized exchanges, namely ease-of-use and the stratification of information. Matcha’s prices are comparable, if not better, than many of its competitors, and it is a great tool for DeFi traders. Currently, there is a lot of speculation regarding an airdrop for the platform's users, akin to Uniswap and 1inch.
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DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.