One of the biggest issues in the cryptocurrency exchange community, namely with centralized exchanges, is the ever-present possibility of the exchange being hacked. There is the other possibility of a scandal surrounding the central entity behind the exchange such as the ones seen with Mt.Gox and more recently, Quadriga. These centralized exchanges require you to turn over custody of your assets to the exchange and therefore you have no control over their security in the event of a hack or scam. As a result, decentralized exchanges, where you maintain custody of your assets, have become increasing popular and are gaining traction in the world of crypto trading. But what are the top decentralized exchanges and are they right for you? We will tell you everything you need to know about decentralized exchanges and help you pick the best decentralized crypto exchange for you.
By: Evan Jones | Oct 6, 2020 | Modified Oct 16, 2020
Simply put, a decentralized exchange is an exchange without a central authority. This means there is no single entity or company holding users’ assets. The user maintains control over their private keys and they never turn over custody of their assets to someone else. This means there is not a single point of failure and as a result decentralized trading is a much more secure and private experience. Top decentralized exchanges require no personal information and often require no registration of any kind.
Most decentralized exchanges are open source projects built on the Ethereum blockchain and utilizing smart contracts to perform the users’ desired exchange of digital assets. In order to maximize the number of trading pairs they aim to be cross-chain compatible so that you can trade any asset you wish, and because there is no central authority facilitating the transaction the trading fees are much lower, if there are any at all. In general it is a simple process to make a trade, you pick the asset you want, and the asset you want to trade for it, follow the steps that generally involve you sending your assets to a smart contract and picking a destination wallet address, and it takes care of the rest. Your new assets are deposited at the address you chose.
The main things you are going to want to look for in a decentralized exchange are ease of use, trading fees, trade volume/liquidity, anonymity, and trading pairs. Trade volume/liquidity will affect the amount you receive, often referred to as slippage; if the price of the asset changes because the trade is taking a while to be fulfilled, or you’ve placed a large order, you could receive more or less of your desired asset. The top decentralized exchanges offer minimal fees, a multitude of trading pairs, and are simple point and click swaps that happen nearly instantaneously to ensure consistent trades.
Uniswap is a decentralized exchange operating on the Ethereum blockchain. It allows for instant swaps of any ERC-20 asset with one click trades. It is trustless, permissionless and operates on the back of underlying liquidity pools. These pools allow anyone to create a market by supplying two underlying tokens. In return they receive a 0.3% trading fee anytime the trading pair is used. Uniswap does not have its own token meaning users receive their fees in the form of the assets they provided to the pool.
Like Uniswap, Kyber Swap operates on liquidity pools that are provided by users in return for a 0.3% trading fee share whenever that pair is used. Kyber has its own token called Kyber Network Crystals (KNC) which are used for governance and to claim the trading fees earned. Kyber has some of the deepest liquidity pools of all the best decentralized exchanges and many Decentralized Finance applications use Kyber as their underlying protocol.
The Waves Decentralized Exchange operates on the Waves blockchain. They have their own asset called WAVES, and you can exchange any supported asset for any other supported asset, such as Bitcoin for Waves. It accelerates the exchange process by using a centralized matching service which allows you to get the best of both the centralized and decentralized worlds. This combination is effective in reducing slippage.
dYdX is a unique decentralized exchange because it allows users to go long or short on Ethereum with up to 5x leverage in a permissionless fashion. dYdX also provides cross-margin lending and borrowing. This means users can earn passive income with supported assets sit on the exchange. Capital supplied on dYdX collects interest even while it is being used on an active trading position. They also offer spot markets for seamless conversion between supported assets.
0x protocol is a decentralized exchange on the Ethereum blockchain in which orders are transported and confirmed off-chain, massively reducing gas costs and reducing congestion on the main Ethereum chain. Transactions only run through the Ethereum network when a trade finalizes, allowing users to reduce the gas fees associated with trading operations. Relayers help broadcast orders and collect a fee in ZRX each time they facilitate a trade. Relayers can be built by anyone and are the backbone of the protocol’s success.
Curve Finance is a decentralized exchange built on Ethereum. It is specifically designed to provide efficient trading between cryptocurrencies of the same value and provide high annual interest returns on cryptocurrency funds deposited into Curve Finance by liquidity providers. They have their own governance token, CRV, which helps provide liquidity to their asset pools. Curve is a somewhat riskier decentralized exchange and has been audited a couple times already.
IDEX is a decentralized exchange operating on the Ethereum blockchain. IDEX is the first Ethereum based decentralized smart contract exchange to support real-time trading. It claims to be the most advanced Ethereum DEX. It supports limit and market orders, gas-free cancels, and the ability to fill many trades at once. The exchange consists of a smart contract, a trading engine, and a “transaction processing arbiter”. The smart contract is responsible for storing all assets and executing trade settlement. The user has to verify all trades using their private keys.
Airswap operates on the Ethereum blockchain, and they have their own token called Airswap Token (AST). AirSwap created their Swap Protocol to enable transaction free trading. The Swap Protocol uses smart contracts on the Ethereum blockchain to settle orders. Everything else is handled off-chain. This is much like 0x. AST primarily functions as a means for market makers to set markets on AirSwap, like with Uniswap, providing liquidity for the exchange.
Dex.ag is a decentralized exchange aggregator and integrates the liquidity pools of many other of the best decentralized exchanges like Uniswap, 0x, Kyber, and Curve. It searches all these other decentralized exchanges in order to find you the best price for your desired trade. It is free to use and is a convenient tool for users who want to find the best rate without visiting each potential decentralized exchange.