The crypto market is one of the most diverse sectors in the financial market. This is because it houses a whole list of projects that traders can leverage to make profits. Asides from that, the innovations in the sector are always ongoing, opening traders to more opportunities. While most of the traders in the industry are still leveraging features on centralized exchanges, others have moved forward to decentralized exchanges. This is because traders see it as one that opens up more earning opportunities in the market. In this article, we will be looking into what decentralized exchanges are with a highlight of the top 5 in June 2022.
What Are Decentralized Exchanges (DEX)?
Decentralized exchanges are exchange platforms in the decentralized finance sector where traders carry out activities. These platforms allow traders to carry out their transactions on a peer-to-peer basis. This means that traders are eligible to trade without the intervention of the platform or another third party. However, for transactions to be guided, traders must adhere strictly to the rules of the smart contracts of every platform. One of the best features of decentralized exchanges is the anonymity that it provides users.
Anonymity is one of the bedrocks of crypto because it helps traders carry out activities in a decentralized nature. Most wallets used to carry out transactions on decentralized exchanges are non-custodial. This means that only the traders can hold the private keys to their wallets. On the other hand, private keys are a set of 12 or 24-word phrases that are used to access decentralized accounts. Once a user loses his code, the wallet is gone for life. Traders can carry out different activities on these exchanges, including swapping, staking, lending, and borrowing, among others. They are also built on blockchains that allow users to leverage their smart contracts to carry out business.
What Are Centralized Exchanges (CEX)?
Unlike decentralized exchanges, centralized exchanges are platforms that are controlled by a central entity. These platforms are charged with keeping the details and funds of users safe. Users are provided with hot wallets as the platform holds on to the private keys of their wallets. Transactions on centralized exchanges are swift. Unlike decentralized exchanges, traders need not interact with smart contracts, making transactions automatic. Centralized exchanges provide a small degree of anonymity. This is because they are a central entity and obey the rules and regulations of their countries. The platforms mandate traders to provide their details and verify them upon registration. Also, traders are provided with various tokens that they can purchase. One of the features that stands centralized exchanges out is the simplicity of carrying out activities across the platforms.
Differences Between A DEX And A CEX
Although both pass as an exchange, certain features tell them apart. Below are some of the features that differentiate DEX from CEX;
KYC/2FA
The first major difference between a CEX and a DEX is that CEX mandates registration and verification of users while DEX does not demand it. DEX deals with anonymity, and signing up and going through KYC will defeat the purpose. However, a centralized entity must obey the rules and regulations of governments. This is one of the reasons that users are subjected to KYC on the platform.
Transaction Processing
As evident in the definitions above, carrying out transactions on the DEX and CEX are two very different activities. However, the end game is to trade or hold digital assets. To carry out transactions on the DEX, traders are need to leverage smart contracts. While on centralized exchanges, users carry out their trades automatically. Transactions are also done on a peer-to-peer basis on DEX, while CEX allows traders to carry out all kinds of transactions.
Wallet Custody
Although the wallets on both platforms are slightly the same, it has core differences that tell them so apart. For example, the type of wallets used on DEX and CEX are the same. This is because DEX platforms provide non-custodial wallets while CEX provides custodial wallets. Traders are in charge of their wallets on DEX, while the platforms are responsible for safeguarding the wallets on CEX. DEX provides users with a seed phrase used to unlock the wallet, while centralized entities hold the seed phrase and ensure the account is inaccessible.
Top 5 DEX By Market Cap
Since we have established what a decentralized exchange is, we will be looking at the top 5 according to market cap. This will help traders navigate their ways to find top exchanges in the market. Below are the top 5 DEX in the decentralized finance sector;
Uniswap V3 ($1.2 billion)
The Uniswap V3 is a family of the older Uniswap models on the Ethereum blockchain. The protocol allows liquidity providers to choose the price range they want to set their capital. The platform also combines the positions held by different traders into one to enable a single curve that users can trade against. The platform also rewards liquidity providers based on the degree of risk they undertake in the market. However, they can also control the number of risks they are open to by holding only assets that they want. The decentralized exchange has a 24-hour trading volume of $1,203,471,662.
DyDx ($954 million)
The DYdX platform is a decentralized exchange that provides the capabilities for traders to carry out margin trading services. Interested traders can leverage the platform to trade tokens like Bitcoin, Solana, etc. Most of the services that the platform are on the Ethereum blockchain. The platform also has a layer 2 platform that settles transactions faster and charges smaller fees for transactions. DYdX has gathered enough hype in the market due to rivaling firms like FTX to provide traders with a decentralized perpetual service. Traders interested in borrowing and lending in the DeFi sector can do so on the platform. The decentralized exchange presently has a 24-hour trading volume of $843 million in the last 24 hours.
Pancakeswap (546 million)
The Pancakeswap decentralized exchange provides traders with swapping services. Traders interested in carrying out swapping can do so with the native token of the Binance chain. The dex uses an AMM model whereby traders are open to trade against the liquidity pool on the platform. Users deposit the funds in the pool to receive LP tokens. Traders who want to reclaim their tokens can trade in their LP and take their tokens. Asides from the LP tokens, traders are open to holding CAKE and SYRUP. Should traders choose to lock their LP tokens, they will earn rewards in CAKE. Traders who then stake CAKE will get their rewards in SYRUP which they can use for many activities on the dex. Pancakeswap presently has a trading volume of 546 million in the last 24 hours.
Kine Protocol ($251 million)
The Kine protocol is a platform that thrives on providing liquidity pools that serve a general purpose. These liquidity pools work on a peer to pool basis with users customizing the backing assets for their good. The protocols enable users to open and close positions as they deem fit while providing trusted price feeds. This way, they avoid the need for any counterparties. Kine removes the barrier between trading protocols with its peer to pool model by enabling users to submit collateral with any tokens built on Ethereum. Users can also choose to stake KINE, the native token of the platform, and earn corresponding rewards. Kine Protocol presently boasts a trading volume of $251 million in the last 24 hours.
Honeyswap ($205 million)
The Honeyswap decentralized exchange is a platform on the Genesis blockchain. It houses a list of decentralized exchanges under the management of the 1Hive DAO. The platform acts to provide funding to the 1Hive DAO community. The DAO community is focuses on testing computer models of token distribution. However, they carry out the testing in a very secure environment. Holders are DAO members, which means they participate in decision-making. Honey also provides an opportunity for members to improve their stake and have more days in the community. Presently, Honeyswap has a trading volume of $205 million in the last 24 hours.
Conclusion
With the centralized tokens still leading the market’s fall, traders could leverage the decentralized finance market to make profits. Although the market is more technical than the centralized system, traders can catch up quickly after a few tutorials. However, traders should ensure that they are watchful and alert in the market. This is because it has deeper anonymity, and getting scams and hacks are very likely. Lastly, carry out your research and only invest or purchase tokens with only funds you can afford to lose.
