Unlike traditional exchanges and centralized exchanges (CEXs), decentralized exchanges (DEXs) relinquish the need for a centralized authority to govern the exchange. Instead, DEXs offer a decentralized autonomous organization (DAO) that is instead governed through the use of a governance token, allowing their token holders to raise proposals and vote out the outcome of the platform.
When it comes to crypto trading for most cryptocurrency users, finding the perfect DEX to meet your needs among the multiple exchanges that exist is vital.
We're going to dive into some of the most popular DEXs in the crypto space and break down the key differences between the exchanges.
Curve Finance is a DEX and an Automated Market Maker (AMM) platform with a core focus on providing liquidity pools to only the most stable crypto assets. Curve only offers liquidity to crypto assets of similar types, e.g. stable coin to stable coin, USDC to USDT or wrapped token to wrapped token, WBTC to HBTC. By having such simple smart contracts, Curve Finance is extremely simple to use and is a highly secure platform. Because the platform focuses on only providing liquidity to similar asset classes, the transaction fees are much lower than other decentralized exchanges.
Balancer is an Automated Market Maker (AMM) platform based on the Ethereum blockchain. The key features of Balancer are a set of algorithms which offer full control of interactions between traders and liquidity pools.
Balancer can be used to create decentralized exchanges and liquidity pools, offering a great deal of customization when it comes to liquidity, allowing for custom token weights, swap fees and customizable liquidity ratios.
Balancer V2 is a protocol that aims to reduce Ethereum trading fees through the use of vault architecture, thereby allowing users to trade through Balancer liquidity pools at a fraction of the price of other platforms.
UniSwap is one of the most popular DEXs in the DeFi space. It's a completely open source decentralized exchange based on the Ethereum blockchain. Due to its open source nature, the UniSwap code can be leveraged by others to create their own decentralized exchanges.
UniSwap offers users the ability to list tokens on their exchange for free, and due to UniSwap's use of liquidity pools, users can trade tokens without any middleman or trading fees. Any token can be added to UniSwap by just creating liquidity pools by pairing the token with ETH or any other ERC-20 token, creating trading pairs.
The token price of tokens listed on UniSwap is determined by their 'Constant Product Market Maker Model'. This model applies the equation 'x * y = k' against the UniSwap pools, with x being the token in question, y being ETH, and k being a constant value. The demand of buys and sells against the liquidity pool is what causes the price to increase or decrease. If somebody purchases the token with ETH, the amount of tokens in the liquidity pool decreases and thus to keep the constant value the same, the token price must increase; thus determining the current price of the token.
Due to the nature of the UniSwap liquidity pools, ensuring adequate liquidity is available to facilitate trades is vital to the operation of the platform. UniSwap encourages liquidity providers to provide liquidity by rewarding them for their efforts. All transactions made on UniSwap are charged with a small liquidity provider fee, which is distributed back out to the liquidity providers as a reward.
UniSwap also has a governance token of their own: UNI. The UNI token gives its holders the right to vote on any developments or changes to the platform, including how tokens are allocated to its users and team wallets and any fees associated with the platform.
Curve, Balancer and UniSwap are all popular DEX's within the crypto space. However, they all benefit the ecosystem in similar but distinct ways.
Curve Finance is a decentralized exchange that specializes in offering liquidity pools that are paired to stable coins, allowing for users to buy much more stable assets that won't be affected by the current market conditions of that blockchain's native gas token.
Balancer, on the other hand, specializes in offering a wide range of different trading pairs for the tokens they list, giving their users a huge variety of different liquidity pools to choose from. On top of this, Balancer gives users the greatest amount of flexibility and customization when it comes to listing their tokens, offering the ability to have customer token weights, customer swap fees, and non-standard liquidity pool ratios.
UniSwap is by far the biggest of the three decentralized exchanges, although it doesn't offer quite as many trading pair options as the other two exchanges. The sheer amount of assets that are listed on UniSwap, its proven past history and its ease of use continues to attract a large number of investors to the exchange.
PancakeSwap is a decentralized exchange that runs on the BNB Chain (also known as Binance Smart Chain or simply as BSC). PancakeSwap took inspiration from UniSwap, thus the two DEXs are very similar in terms of what they offer. PancakeSwap saw great success when BSC first started to become popular and soon skyrocketed to become the biggest decentralized exchange on the BSC blockchain.
BSC hit the scene and quickly became one of the most popular blockchains due to a few shortcomings of the Ethereum blockchain: its scalability issues, causing extortionate gas fees and network congestion. BSC offered extremely quick and low price transactions in comparison to Ethereum at a time where the crypto market was booming.
PancakeSwap's total locked value (TVL) currently sits at $3.85bn. However, in April of 2021 this spiked to a TVL of $8.6bn. In comparison, UniSwap currently has a TVL of $5.82bn, and had a max TVL of $10.5bn in December 2021.
Stable coin based liquidity pools are fast becoming a popular trading pair on decentralized exchanges.
Traditionally, liquidity pools were created by pairing your token with the blockchain’s native gas token. This tended to be the better option as users already held the blockchains native gas token and thus reduced the amount of tokens required by the user to get access to their tokens. However, pairing with the blockchain's native gas token does come with one big caveat. As the price of the native gas token is also liquid, fluctuations in the price of the native gas token will have a direct impact on the value of your liquidity pool and thus have an impact on the price of your token. This however, works both ways. If your blockchain's native gas token is doing well and the price rises, so will your token's price, but if the price of the gas token falls, so will the price of any token using the gas token in their trading pairs.
This uncertainty, especially during bear markets and negative price movements, is leading more projects to use stable coins as the base of their trading pairs, allowing for more stable price action, and price action that is solely determined by the actions and success of their token, rather than being influenced by external factors.