A 5-Minute Guide on Decentralized Exchanges

A short oeuvre on the state of decentralized exchanges from Alex Nikolaev, CEO ZILD.

Cryptocurrency exchanges play a vital role in the blockchain ecosystem. They have played an instrumental role in making the crypto industry what it is today.

But cryptocurrency exchange is a broad term — There are two types of exchanges. The first one is the most common, and it is known as the centralized exchange. The second one is the rising star among the types of exchanges. Yes, we are talking about decentralized exchanges. This article is all about decentralized exchanges. Please do not mind if we go a little overboard while talking about decentralized exchanges as we truly believe in them.

Technically speaking, decentralization is the core concept of blockchain. Hence, decentralized exchanges are the original flag bearers of the blockchain industry. The decentralized exchanges are also known as the DEX popularly. You can define decentralized exchange as the online service that facilitates peer-to-peer exchange of cryptocurrencies between two parties.

You must be having a question — Which exact problem does decentralized exchange solve? The first thing is that DEX is actually meant to solve the issues that plague the centralized exchanges. Through decentralized exchanges, a trader can store and manage funds independently of the exchanges. It means that there’s no need for any third party involvement in DEX. This is why the users can directly transact among themselves in cryptocurrencies.

The central theme of decentralized exchanges is that it is either managed by the participants or through automatic means. The distributed ledger technology helps keep the assets safe on the exchange.

Growing Market Share of Decentralized Exchanges

As of now, centralized exchanges maintain a significant lead over the decentralized exchanges. Yet, DEX is growing slowly but steadily. The total trading volume on decentralized exchanges equaled 4% of the trading volume on centralized exchanges in July. That’s indeed a milestone for the decentralized exchanges.

The total trading volume on decentralized exchanges touched a figure of $4 billion in July — Never have DEX trading volume been so high before that. If you compare the trading volume on DEX in June to that in July, you will find that there was an increase of 2.1%. It is a wonderful milestone for the decentralized exchanges as the trading volume on DEX had never even crossed 1% of the centralized exchanges’ total trading volume before July.

Decentralized Exchanges — What are Their Types?

When it comes to the types of decentralized exchanges, there are two types. The first one is currency-centric, and the other one is currency-neutral or currency-agnostic. We believe that the names must have already disclosed the concept behind them.

The currency-centric exchanges belong specifically to a blockchain that escrows it’s own native currency. There are many such blockchains today. The prevalent ones among them are Ethereum and Tron.

On the other hand, the currency-neutral decentralized exchanges are not tied to any specific blockchain networks. A developer can build a decentralized exchange on top of multiple blockchain networks.

The good thing about this is that the DEX doesn’t have to limit to any particular kind of cryptocurrency. The DEX users do not have to worry about security when transacting on them. It is a fully-secured setup and pretty transparent about how orders are handled on it.

How do Decentralized Exchanges Operate?

You can call decentralized exchanges as a facilitator rather than a middleman. Basically, it facilitates the meeting between buyers and sellers so they can trade with each other. The most important thing that decentralized exchanges do is that they eliminate the middleman. It leads to total removal of fees or reduction in it.

Both buyers and sellers can be at ease when it comes to security on the decentralized exchanges. The decentralized exchanges do not ask for any personal information from them. There’s no chance of price and trading manipulation on DEX. It doesn’t mean that decentralized exchanges don’t have their share of problems.

As decentralized exchanges don’t ask for any personal information from you, they won’t be able to assist you if your account is hacked. So, the decentralized exchanges have no centralized components in it? Straightforwardly speaking, it is perfectly possible to retain centralization in DEX, at least in parts. There are some parts of the operations at DEX where many operators still maintain the control.

A Battle for the Throne of Decentralized Exchanges — Uniswap vs Sushi!

Believe it or not — Just two weeks before, Uniswap was squarely against Sushiswap, it’s a new competitor. Let’s know more about this battle of DEX titans. First, what is Uniswap? It is a DEX which is hosted on the Ethereum blockchain. You can call it an automatic market Maker technically as it lets anyone swap tokens Ethereum blockchain.

Uniswap sits at the top when it comes to the largest decentralized exchanges in the world in terms of the trading volume. Most of the growth that Uniswap saw has largely taken place in 2020. The growth was such that the total locked-in value of Uniswap saw a three-fold rise in mid-August, from $50M to $150M.

Regardless of Uniswap’s growing prominence, many of its proponents were unhappy about the involvement of VCs in Uniswap. The reason being that Uniswap was supposed to follow the format of the community-run platform. Instead, Uniswap started losing decentralization, and hence, there was an increase in skepticism about Uniswap.

Pretty soon, Sushiswap opened its doors, and viola, it started seeing huge traction. A user under the pseudonym “Chef Nomi” was leading Sushiswap. So, what is Sushiswap? In simple words, it is a fork of Uniswap. Sushiswap decided to offer liquidity mining, the hottest trend in DeFi. It got all the attention to them and helped them onboard quite a significant number of liquidity providers.

The decision of offering liquidity mining on Sushiswap was a masterstroke. It helped Sushiswap bootstrap adoption and got them all the attention in the crypto space. At the same time, it made Sushiswap a worthy contender of Uniswap. It is because Sushiswap had put the liquidity providers at the governing seat of the platform.

Sushiswap also opted for a “fair launch” system where they assured that there won’t be any VC allocation. Under the fair launch system, Sushiswap will also put a cap on development fund allocation to keep it small (10%). The early adopters of Sushiswap will also receive rewards through an open pre-mine.

So, did Sushiswap overtake Uniswap? They were pretty short of their target. Now, the chances of it happening are almost none. As of now, the total value locked with Uniswap is far more than that in Sushiswap. The number of liquidity providers also decreased on Sushiswap when the block rewards for liquidity providers was decreased to 100 from 1000 tokens.

Future of Decentralized Exchanges

With growing trading volume, decentralized exchanges are slowly and steadily establishing its position in the crypto trading space. The crypto community, too, is now signing up aggressively on decentralized exchanges. With the craze for DeFi at its peak, we expect that DEX trading volume will keep on rising.

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