As discussed in previous articles about DEX, it’s essential to acknowledge their working and as well accessing them through one’s wallet. Therefore, at first for making DEX more clear, it’s a decentralised exchange with peer-to-peer marketplace where transactions tend to happen directly between the crypto traders. DEX helps in accomplishing core possibilities of crypto are financial transactions which are not officiated by the brokers, banks or any other middlemen. Also various famous DEXs are Sushiwap and Uniswap which run on blockchain which is Ethereum based and also contribute in growth of tools of decentralised finance(DeFi), which form a big range of financial services that are readily there with the help of compatible crypto wallet. Where DEXs are growing in first quarter of 2021, having $217 billion in transactions which flow by way of decentralised exchanges. But by April 2021, a high of above two billion DeFi traders, thereby having ten fold hike from May 2020.
Working Of DEXs
The DEXs aren’t agreeing for exchanges between Fiat and crypto as Coinbase does, they specifically trade cryptocurrency tokens for other cryptocurrency tokens with the aid of centralised exchange (or CEX), one could trade fiat for crypto or crypto-crypto pairs or one could say Bitcoin for ETH. Advance steps could be taken as setting the limit orders or conducting margin trades. Each of these transactions are conducted with the help of exchange alone through an ‘order book’ which tends to form the price for certain cryptocurrency being dependent on present sell and buying of orders and similar ways are being used by Nasdaq (a stock exchange).
Whereas, Decentralised exchanges are a set of smart contracts. They establish value of different cryptocurrencies against every algorithm and use liquidity pools– where the investors apparently lock the funds for receiving interest like rewards against the same, so as to make trades easy. On the other hand the transactions which are made on centralised exchange are being recorded on the similar exchange’s inside database, where the DEX transactions are directly stored on blockchain.
DEX are made on a code which is open source, which means anybody who are inclined towards same would be able to watch their working exactly. This is also directly defining that the developers would grab the current code for generating newer competing projects and this is the reason why Uniswap’s code is accepted by total host of DEXs alongwith “swap” under the names as Sushiswap and Pancake swap.
Advantages Of DEX
Following are the benefits of using DEX as:
- Huge Variety: DeFi aids in giving a solution to the search of hot token at initial stages. DEX on the other hand offer a virtual large amount of tokens, from known to absurd and also random ones. This is so as Ethereum-based token could be made and liquidity pool could be made for the same. Therefore an array of projects could be attained but both could be vetted and unvented.
- Reduced risks of Hacking: As each and every fund in a DEX trade are being saved on the traders own wallet, so they are less prone towards being hacked. (DEX therefore moves towards reducing the risk known as “counterparty risk”, and this is very much associated with one of the parties interested, alongwith the central authority in non-Defi transaction.
- Anonymous: There is no requirement of any sort of personal information for making use of famous DEXs.
- Purpose in developing world: Lending concerning peer-to-peer, faster transactions, anonymity is made possible by way of DEXs which have made them famous in developing economies and where such a solid banking infrastructure may not be there. Also people having smartphone or internet connection are having advantage for trading with the help of DEX.
Drawbacks Of DEX and DeFi
The user interfaces are a tricky game where navigation of decentralised exchanges demand specific knowledge and such interfaces are not that easy every time. Therefore one has to be ready with thorough research work, without keeping any expectations from DEX for offering handholding. Certain precautionary steps are required so as to avoid the unfixable error as sending coins to wrong wallet. Certain problem also lies with the impermanent loss which could result from pairing a high volatile cryptocurrency to a low volatile one in liquidity pool.
Another major drawback is the smart contract vulnerability as any DeFi protocol is much safe as the smart contracts which power them and code could certain harmful bugs ( although having thorough long and time taking testing) which could ultimately result in loss of individual tokens.
Even the coins are riskier as large amount of tokens are available on many of the DEXs and large amount of scams and schemes are also attached with the same. A token for instance, which is on the hot plate could be at once pulled off when bunch of new tokens are created, thereby tanking the value of the coin and make the liquidity pool powerful. Before purchasing newer cryptocurrency or even experimenting with newer protocol, it is very essential to learn maximum from it by reading white papers, visiting developers Twitter feeds and searching for audits of any certain project in which an individual takes interest (where big auditors involve Chain Security, Consensys, Certik, also trail of Bits).
Interaction with a DEX
Connection with a DEX could be formed with the aid of Uniswap, thereby using a crypto wallet as Metamask (for web browser) or may be Coinbase Wallet (for mobile). Another manner of interaction with DEX could be made directly with browser which is made in form of Coinbase wallet, but to make it easy one can pull the website up on individual’s computer web browser, where when Uniswap is concerned, it’s address would be app.Uniswap.org, thereafter one has to click “connect to a wallet”.
Next step on the board would be with the QR code which would pop up and could be scanned with your phone’s camera. Just after the scan, your wallet is ready for being connected to DEX.
After all this, there would also be need of supply of Ethereum for initiating trading on maximum no. of DEXs , which one could easily attain from an exchange as Coinbase. Basic reason behind having the need of Ethereum is to attain the paying fees(as gas) which is demanded for any sort of transaction which is there on blockchain, as these are separate from the fee which DEX charges on its own.
Working Of DEX Fees
Uniswap charges 0.3% fee which divides between the liquidity providers and protocol fee being added on in near future. The main point which has to be taken care off, is the fees which DEX charges could be waved off by gas fees for using the Ethereum network. Furthermore, for lowering the fees and enhancing the transactions on the other hand, the ETH2 upgrade is designed.
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