When it comes to exchanging digital assets with limited slippage, the blockchain ecosystem at large is still heavily reliant on centralized players to process trades in an instantaneous, cost effective manner. As such, it’s become common practice for large secondary exchanges such as Binance or Coinbase to maintain custody of the underlying assets in order to offer an optimized trading experience.
While many of us have had nothing but great experiences trading on these exchanges, it’s important to remember that we are placing full trust in these providers to custody and secure our digital assets. For those of you who think that exchanges like Binance are unhackable, it’s worth recalling the iconic Mt. Gox hack in 2014 which was at that point responsible for over 70% of all Bitcoin volume. In short, what was once the biggest exchange on the market took a turn for the worse virtually overnight, resulting in the loss of over 750,000 BTC worth of consumer funds.
More recently, stories such as the Quadriga exit scam have shown that when it comes to securely storing and trading digital assets, you are the only person you can truly trust. As the digital asset ecosystem continues to grow, it’s safe to assume that hacking attempts and phishing scams will only become more and more prevalent. As such, a number of clear use-case for decentralized exchanges (DEXs) are emerging on a regular basis.
What is a DEX?
Decentralized Exchanges, more commonly known as DEXs, present a next-generation application of distributed ledger technology by allowing any two parties to trade assets in an entirely peer-to-peer fashion without having to trust a third party.
For this to work, decentralized trade are handled between two parties using smart contracts. No intermediaries means no fees, no deposits, no sign-ups, and no counterparty risk. In most cases, tokens never leave your wallet until they’ve successfully been swapped.
This means that users now have the ability to swap digital assets at market value with an unknown counterparty, all while retaining full custody of the underlying asset. DEXs can be thought of as the UI/UX interface that intuitively allows two users to interact via a trading pair with an established market value.
Similar to centralized exchanges, most DEXs come complete with a variety of trading pairs, order pairs, charts and functionalities. In practice, users generally connect to a DEX using a private key or JSON file, where virtually all reputable DEXs ensure to never maintain an active record of the sensitive information used to access the platform.
Price and quantity are set by one party — the maker — and either accepted or dismissed by another party — the taker. Both sides cryptographically sign the trade using their wallet, whether browser-based like MetaMask, web-based like Portis, or hardware like Ledger.
Top DEXs in 2019
When it comes to the architecture of DEXs, there are a very wide variety of approaches being used on the market today. Whereas some DEXs such as Uniswap are completely decentralized, others such as IDEX have chosen to offer a hybrid approach in order to adhere to certain regulatory requirements while simultaneously offering the core benefits of the decentralized trading experience in a more compliant fashion.
For your convenience, we’ve aggregated a list of some of the most well-known DEXs on the market today:
Uniswap is a fully decentralized exchange built on the Ethereum Protocol. The exchange was launched in November of 2018 and as of August 13th, just passed 1,000,000 worth of ETH trading volume.
Uniswap provides a trustless and permissionless mechanism for exchanging and listing tokens within the Ethereum ecosystem. This allows people to easily swap ETH for any ERC20 tokens and vice versa. Moreover, Uniswap utilizes liquidity pools that allow anyone to create a market and supply with it an equal value of ETH and the respective ERC20 token. Creators of these pairs earn a fee each time the market is used.
Unlike most exchanges, Uniswap does not have a native token and therefore, liquidity providers earn the fees dominated in the assets within their respective market.
IDEX – idex.market
Formerly known as Auroa DAO, IDEX is currently the largest DEX on Ethereum. At the time of writing, IDEX is said to account for 55% of all DEX volume on etherscan.
Unlike Uniswap, IDEX is a hybrid, semi-decentralized exchange. Similarly, IDEX provides a trustless, real-time, high-throughput trading experience in conjunction with blockchain based settlement. By centrally managing trade matching and Ethereum transaction dispatch, IDEX enables users to trade continuously without waiting for transactions to mine, fill multiple orders at once, and cancel orders immediately without gas costs.
All transactions, such as deposits and trades, must be authorized by end users and their private key, but IDEX maintains ownership of broadcasting these authorized transactions to the network. By carefully sequencing the dispatch of these authorized transactions, IDEX provides the speed and user experience of a centralized exchange combined with the security and auditability of a decentralized exchange.
IDEX currently uses two native tokens, AURA and DVIP, to further incentivize usage of the platform. Simply put, AURA is staked to earn a percentage of all transaction fees on the network. AURA can be used to purchase DVIP tokens (1 DVIP = 50,000 AURA) which are used to purchase IDEX memberships, granting users discounts on trading fees on IDEX transactions. DVIP memberships will last until 2020, granting users either free trades and no AURA rewards, 2x Market Making rewards and full trade fees or some combination of both.
Kyber – kyber.network
Kyber Network is a fully on-chain liquidity protocol for implementing instantaneous digital asset token swaps in a decentralized manner on any smart contract enabled blockchain. The design is intended to allow any party to contribute to an aggregated pool of liquidity within each blockchain while providing a single endpoint for takers to execute trades.
Kyber uses a native token, Kyber Network Crystals, to enable transactions and governance decisions across different chains linked to the underlying protocol. Kyber went live in February of 2018 and has since had a strong focus on the integration of DeFi at large. Moreover, the project recently implemented the ability for limit orders, spurring it’s monthly volume to the highest it’s ever been $59.4M a the time of writing.
Airswap – airswap.io
Airswap was founded in 2017 and given a lot of attention as one of the more promising Consensys Spokes. AirSwap was built on the Swap Protocol which presented a design for an open network to connect to peers based on common interest, to agree on a price through mutual cryptographic signatures, and to settle without intermediaries on the Ethereum blockchain.
The platform uses a native token, AST, to provide two core two utilities. First, holding AST gives traders the ability to add their “intent to trade” to the Airswap Index. This effectively signals to peers their intent to buy or sell specific Ethereum-based tokens. Second, AST gives traders voting power to manage the roles of Oracles within the platform.
Airswap recently announced the Airswap Trader, allowing any two users to Share and settle over-the-counter (OTC) trades with no counterparty risk, no deposits, and no fees.
Full List of DEX’s
|Dex Name||Launch Date||Native Tokens||Underlying Protocol||Estimated Supported Assets||Volume (1-10)||Decentralized (1-10)|
|Switcheo Network||3/18||SWTH||NEO, EOS, Ethereum||70||2||8|
|GO.exchange||3/19||GOT||OmiseGo / Ethereum||7||2||8|
|Bamboo Relay||5/18||N/A||0x / Ethereum||500||1||10|
|Eth2Dai||5/18||N/A||Maker / Etherum||2||6||10|
Why do DEXs Matter?
As illustrated above, regardless of how big or “secure” a centralized exchange gets, you’ll always be trusting someone else with your money. In a world where this is seen as common practice (i.e. major banks such as JP Morgan Chase or Wells Fargo) it’s difficult to understand why retaining your own funds may be advantageous.
First and foremost, the lack of theft is drastically reduced. So long as you’re smart about your private key security and accessibility, the chance at your funds being stolen are virtually zero.
Secondly, decentralized exchanges are inherently censorship-resistant. This means that no one party has the ability to impose regulations, ban currencies or restrict trading. Especially in countries where we’ve seen cryptocurrencies “banned”, decentralized exchanges serve as a vital piece of infrastructure for counterparties to safely and anonymously exchange their digital assets at will. Furthermore, this means that on most decentralized exchanges, any party has the ability to list any digital asset. With DEXs, your project can kiss exorbitant listing fees a thing of the past.
Last but not least, most decentralized exchanges are anonymous. In an ever increasing regulatory-heavy exchange environment, it’s comforting to know that DEXs allow us to continue to enjoy the practice of trading digital assets without having to reveal important personal information such as our name, date of birth and country of origin.
DEX Enhancement Tools
Over the past few months, we’ve noticed that a lot of new tools are being unveiled to help DEXs enjoy more liquidity at large. In this sense, it’s important to recognize some of the ecosystem participants adding much needed tools and infrastructure to increase the DEX trading experience, even if they do not have a consumer facing exchange themselves.
RenVM aims to bring interoperability to DeFi applications. Unlike the other projects on this list, RenVM is not a product or an application in and of itself. Rather, it is a network (and an accompanying SDK) that allows developers to bring multi-chain functionality to their applications.
“Our vision for Ren is a private and interoperable liquidity layer for the decentralized world. Powering the free movement of value between blockchains in zero-knowledge.”
What makes RenVM unique is that it does everything in secret using zero-knowledge proofs and a newly developed sMPC protocol. The state, inputs and outputs of all programs in RenVM are kept hidden from everyone, including the Darknodes that power it. This allows RenVM to securely manage private keys on different blockchains, making it possible to shift tokens between these blockchains in a trustless and decentralized way.
0x & 0x Mesh
0x is a protocol that facilitates low friction peer-to-peer exchange of ERC20 tokens on the Ethereum blockchain. Trades are executed by a system of Ethereum smart contracts that are publicly accessible, free to use and that any dApp can hook into. DApps built on top of the protocol can access public liquidity pools or create their own liquidity pool and charge transaction fees on the resulting volume. 0x currently powers DEXs such as Radar Relay.
The network uses a native token, ZRX, to process transactions and incentivize users to partake in market making activities. New token economics (such as requiring takers to pay a small protocol fee to token stakers) will be making their way into the ZRX ecosystem via the next protocol upgrade in Q3 2019.
This past March, the 0x team announced plans for 0x Mesh, a Docker and eventual browser friendly node system, which is said to massively reduce the effort required to tap into the 0x networked liquidity pool and the technical work associated with maintaining a compliant endpoint.
0x currently relies on relayers to follow a Standard Relay Agreement (SRA) for transactions to be processed using 0x Instant. As such, the network saw a lot relayers suffering from outdated code, resulting in many orders taking longer to surface. With 0x Mesh, more orders will be surfaced in a quicker, more intuitive fashion. Unlike the existing SRA, 0x Mesh features a push-based messaging system and a dynamic set of peers which do not need to be known ahead of time. This is said to makes it much easier to connect to and share orders with other members of the 0x ecosystem.
Each node in the network will score its neighbors based on the quantity and quality (validity, novelty, etc.) of the orders it shares. Since relayers provide a single-access point into the network for their users, they are said to more naturally move towards the core of the network graph, and as a result, be able to offer a better trading experience.
0x Mesh is currently in beta and can be followed here.
Decentralized Exchange Volume Comparisons
By using sources such as DEX Index and the Etherscan DEX Tracker, we can see which of these exchanges have the best spreads along with which are garnering the most volume. As mentioned above, IDEX currently leads the pack in terms of monthly volume.
While the DEX space hasn’t seen as much traction as some early adopters might have liked, it’s clear that this sector of the industry is growing each day. Outside of the DEXs highlighted above, we’d also like to provide a short list of other DEXs with their respective protocol focus. For the sake of the relation to DeFi, we’ve chosen to focus our “Top DEX” attention on those DEXs built on the Ethereum Protocol.
- BinanceDEX (Binance Chain)
- OceanEX (VeChain)
- Switcheo Network (NEO, EOS and Ethereum)
- Bamboo Relay (Wrapped Ether)
- Eth2Dai (Dai)
We’ll continue to add to this list on a regular basis. If you’re interested in having your DEX added to this list, please fill out a request on our contact form.
Cooper is focused on building compelling blockchain products. He currently works as the managing director at Fitzner Blockchain Consulting and is a contributor to DAOs like MetaCartel and Moloch. He is an active member of the Ethereum community and has a strong interest in for-profit businesses such as The Block Crypto and Messari.