What is a decentralized exchange and how does it work?
Next Up: Liquidity Pools & Staking
A decentralized exchange (DEX)¹ is an exchange that facilitates peer to peer crypto transactions from a decentralized protocol² running on blockchain. If you are familiar with the concept of a centralized exchange (CEX)³, you are familiar with the concept of a DEX.
Simply put, a DEX allows you to trade crypto from your web3 wallet⁴, without the need for a third party intermediary. Learn more: DEXs vs CEXs, The Defiant
¹Decentralized Exchange (DEX) refers to a decentralized protocol that facilitates crypto transactions and can be utilized using a web3 wallet. Funds are held in self custody, this means they remain in your wallet before and after swap; you hold your own keys and the wallet belongs to you. Examples of decentralized exchanges are Uniswap, Sushiswap, Balancer and Curve.
²Decentralized Protocol refers to the code that formats procedures and governing systems on the blockchain. Decentralized protocols utilize smart contracts, allowing users to interface directly.
³Centralized Exchange (CEX) refers to a custodial exchange that facilitates crypto transactions. Funds are held in custody by the exchange, and you do not have access to your private keys. This is what people mean when they say "not your keys, not your coins". Examples of centralized exchanges are Coinbase, Binance, FTX and ByBit.
Decentralized exchanges utilize smart contracts and liquidity pooling to provide an autonomous trading experience. Read more on liquidity pooling and smart contracts.
⁴Web3 Wallet refers to a digital wallet used to store digital assets, NFTs and crypto. A web3 wallet allows you to interface with protocols as you browse the DeFi ecosystem. Learn more about Web3 Wallets: What is a Web3 Wallet & Why You Might Need One, Learn Crypto
DeFi is subject to risk, including risk related to smart contracts. Please practice due diligence. All 3rd party sites are provided for convenience only, if you choose to access any such site, you do so at your own risk.
Uniswap DEX Interface
Uniswap is the first fully decentralized automated market maker (AMM)¹, a protocol that facilitates peer-to-peer market making and swapping of ERC-20 tokens. Uniswap protocol was created in 2018 and is now available on 5 networks with highest liquidity on Ethereum, along with thousands of options for tokens to swap.
Users can choose to provide tokens to Uniswap pools for Liquidity Pool (LP) rewards. Using Uniswap v2 on Ethereum, Liquidity providers receive 0.3% of swap fees distributed as rewards directly back to their pooled tokens; LP tokens can also be staked for farming rewards.
Network Compatibility: Highest TVL² - Ethereum
Arbitrum, Optimism, Polygon - Governance Token: UNI
¹Automated Market Maker (AMM) An AMM is a decentralized exchange that utilizes crypto asset pools (liquidity pools) to facilitate trustless crypto transactions. Instead of a traditional order book, assets are priced according to an algorithm in relation to pool assets. Simply put, an AMM is a decentralized protocol for crypto trades, a decentralized exchange (DEX).
²TVL (Total Value Locked) refers to the USD value currently staked in the protocol. A high TVL assumes high liquidity, and results in less slippage when making DEX transactions. High TVL protocols are generally safer.
³Plain Text Links - For all protocols listed (DEX, farm or bridge) you will see an inclusion of plain text links. Get into the habit of recognizing your URLs; Avoid clicking embed links from email and personal messaging, normalize copy pasting URLs into the browser bar instead. Bookmark trusted links to mitigate phishing attempts and trojan attacks.
Curve Finance is a high liquidity AMM, with focus on stablecoin pooling. Curve concentrated liquidity⁴ pools offer the lowest slippage⁵ rates on stablecoin swaps. The Curve model is conservative in low volatility tokens, homogenous pairs and blue chips for concentrated liquidity.
Network Compatibility: Highest TVL - Ethereum
Arbitrum, Avalanche, Fantom, Polygon- Governance Token⁶: CRV
⁴Concentrated Liquidity refers to the ability to select a particular range along the price curve to provide liquidity. With concentrated liquidity, an LP can be concentrated into a target price; Think highly correlated, low volatility pools like USDT/USDC where the price does not diverge. This LP target lowers slippage for traders. Read more about Liquidity Pools.
⁵Slippage can cause you to lose coins due to price movement either during or invoked by your swap, there are two reasons for slippage: protocol liquidity and price volatility. Low liquidity swaps will result in high slippage; always look for the protocol that has the highest liquidity for the lowest amount of slippage. You can adjust your slippage settings on the toggle option of any DEX swap interface to set limits on what you will allow and widen the range for low liquidity swaps. Slippage settings will automatically revert to the last trade you made, so make sure these are low for everyday transactions. Token trading pairs, volume and protocols can be found on individual token pages of CoinGecko or CoinMarketCap.
⁶Governance Token refers to a token that represents ownership in a protocol, token holders have the right to vote and participate in the direction of the protocol; the group of holders are also referred to as a DAO. Learn more: What Are Governance Tokens?, Binance Academy
Sushiswap is a protocol fork⁷ of Uniswaps AMM code launched in 2020 with a new tokenomics⁸ structure for their protocol fee distribution⁹. While both Uniswap v2 and Sushiswap charge transaction fees of 0.3% for every DEX trade. Sushiswap fees are distributed 0.25% to the liquidity providers and 0.05% to SUSHI holders, whereas Uniswap v2 0.3% fees are entirely distributed to liquidity providers.
Network Compatibility: Highest TVL - Ethereum
Arbitrum, Avalanche, BSC, FTM, Optimism - Governance Token: SUSHI
⁷Protocol Fork refers to a protocol that uses the code of another existing protocol, often with its own updates and improvements.
⁸Tokenomics are the economics of any given token and are important to understanding use, distribution, supply and demand characteristics of cryptocurrencies. Learn more: What is Tokenomics?, Coinmarketcap
⁹Fee Distribution is the process of distributing exchange fees from token swaps on an AMM DEX.
1inch is a DEX aggregator¹⁰ finding low fee and low slippage routes for spot trading. 1inch sources routes from over 20 DEXs across networks to provide you with the one offering lowest fees at the time of swap.
Users who stake the 1INCH DAO¹¹ token on the protocol, participating in governance, will receive a 5% gas refund on all ETH fees used for 1inch DEX transactions.
Network Compatibility: Ethereum, Arbitrum, Aurora, Avalanche, BSC, Fantom, Optimism, Polygon & more - Governance Token: 1INCH
¹⁰DEX Aggregator refers to a system that aggregates routes from a variety of decentralized exchanges in order to fulfill your trade. Learn More: Dex Aggregators; The Search Engines of DeFi Trading, The Defiant
¹¹DAO is an acronym for (Decentralized Autonomous Organization) DAO members hold protocol ⁶governance tokens voting for decisions on the direction of protocols and treasuries. Dapps and protocols are governed by DAOs. Learn more: What is a DAO?, Blockchain Education Network
These resources are intended for general guidance and educational purposes only. I am not an investment or financial advisor, and make no representation regarding the advisability of investing.
For convenience only, this website may provide links or pointers to third party sites. While all information is provided in good faith, I make no representations about any other websites that may be accessed from this website. If you choose to access any such sites, you do so at your own risk.
Decentralized Finance is subject to significant risk, including risk related to smart contracts.