What is a Decentralized Exchange?
A decentralized exchange (DEX) is a type of cryptocurrency exchange that operates on a decentralized platform, which means that it is not owned or controlled by a central authority or company. Instead, the exchange is managed by a network of participants who share the responsibility of verifying transactions and maintaining the integrity of the platform.
DEXs are a cornerstone of decentralized finance (DeFi). Due to their permissionless composability, DEXs are a key “money LEGO” upon which more complex financial products can be built.
One of the key benefits of a decentralized exchange is that it eliminates the need for a central authority to oversee and regulate the exchange, which can increase the level of privacy, security, and transparency for users. Additionally, decentralized exchanges are often more resistant to hacking and fraud compared to centralized exchanges since there is no single point of failure.
Why one should consider trading on Decentralized Exchanges?
There are several reasons why someone might choose to trade on a decentralized exchange (DEX):
- Decentralization: Decentralized exchanges work on a decentralized platform, which means they aren’t governed by a single organization or centralized authority. As there is no single point of failure, this can increase the level of privacy, security, and transparency for users.
- Security: Since users control their private keys and are not dependent on a third party to secure their funds, decentralized exchanges frequently have a higher level of security than centralized exchanges.
- There is no KYC: In order to preserve user anonymity, several decentralized exchanges do not require users to go through a Know Your Customer (KYC) procedure.
- Asset variety: Different types of assets are available for trading on decentralized exchanges, including many lesser-known cryptocurrencies that might not be accessible on centralized exchanges.
- Cheaper Fees: Since there is no need for a central authority to oversee and maintain the exchange, decentralized exchanges frequently charge cheaper fees than centralized exchanges.
Top 3 Decentralized Protocols in Web3
There are several protocols in the decentralized exchange space, but three have been standing out in terms of volume, user growth, listings, and token performance. You may have heard of $GMX, traded on Drift Protocol, or hold a spot bag of $PERP, which is the native token of Perpetual Protocol.
Perpetual Protocol is an on-chain perpetual futures DEX with deep liquidity and builder-ready composability. Built on Optimism, traders can trade with up to 20x leverage long or short, have transparent fees, and 24/7 guaranteed liquidity.
Among $PERP Token Utilities, $PERP holders can lock-up, or “stake,” the $PERP in their possession for a fixed amount of time to the Staking Pool. In return, stakers are rewarded with the staking incentive.
Once $PERP holders have staked their tokens, they can then use their staked $PERP to vote on or propose new ideas that can be used to improve the protocol.
GMX is a decentralized spot and perpetual exchange that supports low swap fees and zero price impact trades. Trading is supported by a unique multi-asset pool that earns liquidity providers fees from market making, swap fees and leverage trading.
$GMX is the platform’s utility and governance token, holding the token unlocks a variety of benefits. Just like Perpetual Protocol’s $PERP, $GMX can be staked to get rewards on the platform.
30% of fees generated from swaps and leverage trading are converted to ETH / AVAX and distributed to staked GMX tokens. If you are staking on Arbitrum you would receive ETH, if you are staking on Avalanche then you would receive AVAX.
Drift Protocol is an open-sourced, decentralized exchange built on the Solana blockchain that enables transparent and non-custodial trading of cryptocurrencies. It supports low slippage, low fees, and minimal price impact on all trades. Drift offers four primary products, including spot trading, perpetuals trading, borrowing and lending, and passive liquidity provision.
On-chain exchanges suffer from limitations associated with blockchains, such as slow fills, high spreads, and low liquidity. Porting existing off-chain centralized exchange infrastructure to the blockchain results in inefficiency and disincentivizes market-maker participation.
To address these issues, Drift has developed an exchange that is robust, computationally efficient, and incentivizes market maker participation and liquidity provision. Drift’s Liquidity Trifecta comprises three liquidity mechanisms – Just-in-Time (JIT) Auction Liquidity, Limit Orderbook Liquidity, and AMM Liquidity – that are supported by market makers, a decentralized orderbook, and Drift’s AMM, respectively.
Additionally, Drift Protocol is launching an incentivized market maker program this week. With these efforts, Drift Protocol aims to provide a more efficient and incentivized trading experience that addresses the limitations of on-chain exchanges.
Among the three protocols mentioned, one stands out
While issuing a token may sound easy, it is not on the background. The token must be sustained over years and have well-designed tokenomics to succeed. Though the design of tokenomics is a though job, most decentralized exchange protocols issue a token to govern their platform and reward their users with incentives. It wouldn’t be wrong to say that almost every decentralized exchange platform launches its own native cryptocurrency, but these tokens may not perform as expected over time.
Unlike Perp Protocol or GMX, Drift Protocol has not yet launched a token. After the launch of Drift v2, the protocol saw tremendous growth in its stats, going parabolic on cumulative volume. Platform users expect an airdrop, but there has been no official announcement from officials yet. However, this does not mean that the platform will not make an airdrop in the future.
Decentralized exchanges offer a more secure and transparent way to trade cryptocurrencies, providing users with ownership and self-custody of their assets.
Although switching from centralized exchanges may present challenges, such as a learning curve, decentralized exchanges offer lower fees, a wider range of assets, and more control over trades. They are a valuable option for those seeking a decentralized, secure, and transparent trading experience. If you have never traded before on a decentralized exchange, you should definitely give it a try.