Decentralized exchanges, or DEXs, are one of the main components of the DeFi ecosystem, and have to some degree kickstarted this new industry.
Exchanges serve a key function in the crypto space, and decentralizing them has been on the to-do-list of the Ethereum community since the very beginning of the project. With first attempts dating back to 2016, the protocols governing DEX projects have been improving radically ever since, which allowed for the DeFi space to take off as phenomenally as it did.
In short, decentralized exchanges allow participants to trade crypto assets such as tokens or stablecoins without having to rely on the intermediary services of a third-party custodian. To understand how that works and why it’s significant, we first need to understand how traditional, aka custodial or centralized exchanges, function.
When using a centralized exchange, you’re essentially depositing your assets in the custody of a corporation such as Binance or Coinbase. This corporation then adds your buy/sell order to an internal ledger called an order book. The moment your order matches in price and amount a corresponding opposite one, an asset exchange is initiated. In technical terms, this means that the custodian withdraws the sellers’s asset from their account, deposits it on the buyer’s account, and vice versa.
This process sounds fairly straightforward, but it only works as seamlessly as depicted here if enough liquidity is provided on the exchange platform. Without liquidity, trade becomes slow, inefficient and often cost-ineffective. On most markets, liquidity is provided as a service by entities called market nakers. Without them, most markets, including traditional stock exchanges, would have a very hard time functioning.
This mode of operation grants a handful of players in the industry immense influence, and some might say, the ability to extract significant rewards. Not only can the exchange platforms themselves refuse to serve certain customers, block assets from being traded, and suppress or promote projects at will, but the big market makers providing liquidity to these platforms wield almost the same degree of unchecked power. Together with a small group of exchange operators, they decide what tokens will be listed and how effectively they’ll be traded. This, as you can imagine, is a very lucrative position to hold.
The whole raison d'être of decentralized exchanges is to dismantle this concentration of power. Instead of having a third party, such as a corporation, take assets into custody, manage order books, and swap assets accordingly, on a DEX most of this process is governed by smart contracts, and executed automatically and immutably on the blockchain. As long as two consenting parties agree on a transaction, it will occur without anyone being able to stop it.
As we’ve seen above, every asset exchange platform has to fulfill the following functions: capital deposits, order registration, order matching, and asset exchange. Decentralized exchanges differ by the manner and degree to which these functions are decentralized and executed as smart contracts on the blockchain.
First generation DEXs, such as EtherDelta, tried to recreate the exact way in which centralized exchanges work by using smart contracts to govern the entire process. For technical reasons, EtherDelta’s order book resided off-chain on a standard server while order matching and asset exchange occurred on the Ethereum blockchain, outside of the control of the EtherDelta team - or anyone else for that matter.
EtherDelta was an amazing proof of concept, but its functionality was fairly limited. The biggest drawback of the project was a chronic lack of liquidity. Traditional market making, which normally solves this problem, wasn't an option since it would be insanely expensive and slow on Ethereum. Market making entails a very large number of orders that have to be constantly created and canceled to sync with market behaviors - something that can't be done profitably, considering Ethereum block times and gas fees.
This bug, however, turned out to be a feature when considering decentralized innovation and the overall health of the industry. This became clear in 2018, with the launch of UniSwap.
UniSwap solved EtherDelta’s liquidity problem by fundamentally reinventing how exchanges function, how they achieve liquidity, and how price discovery works. Instead of relying on market makers to provide liquidity, UniSwap invited the general public to deposit funds into liquidity pools against a fee. These fees are to a large degree the basis of most liquidity mining strategies, and the reason why you’re reading these lines today.
Liquidity pools and the automated market making algorithms which govern them are an ingenious invention that has not only made market makers redundant and has facilitated decentralized trade to an unseen extent, it has also reinvented how price discovery works.
It is often assumed that cryptocurrency is only for the young and reckless. There is, however, a whole new area of cryptocurrency now flourishing that is attractive for even the most sensible saver: decentralized finance (DeFi).
It is often assumed that cryptocurrency is only for the young and reckless. There is, however, a whole new area of cryptocurrency now flourishing that is attractive for even the most sensible saver: decentralized finance (DeFi).
While cryptocurrency adoption is becoming ever more mainstream, knowing how and where to buy your first cryptocurrency is not always clear. In this post, we show you how in a few easy steps.
While cryptocurrency adoption is becoming ever more mainstream, knowing how and where to buy your first cryptocurrency is not always clear. In this post, we show you how in a few easy steps.
Since the debut of the world’s first cryptocurrency, Bitcoin, on January 3, 2009, the value of the entire crypto market has risen to $1.7 trillion as the world’s biggest companies and asset managers are now buying, selling and trading cryptocurrencies. But what exactly is a cryptocurrency, and how much risk comes with using one?
Since the debut of the world’s first cryptocurrency, Bitcoin, on January 3, 2009, the value of the entire crypto market has risen to $1.7 trillion as the world’s biggest companies and asset managers are now buying, selling and trading cryptocurrencies. But what exactly is a cryptocurrency, and how much risk comes with using one?
Safety, as we all know, comes first and nowhere is this truer than in the realm of cryptocurrency. This fast-evolving digital economy is ripe for the picking when it comes to hackers and so keeping your digital assets safe should be at the forefront of all users’ minds. Securing your wallet, where you store your cryptocurrency, is the most important step on this journey and the first to take.
Safety, as we all know, comes first and nowhere is this truer than in the realm of cryptocurrency. This fast-evolving digital economy is ripe for the picking when it comes to hackers and so keeping your digital assets safe should be at the forefront of all users’ minds. Securing your wallet, where you store your cryptocurrency, is the most important step on this journey and the first to take.
We are excited to announce the launch of our Ethereum fund, which will allow our users to earn up to 20% APY on cryptocurrency’s second-biggest asset, Ether (ETH). This adds to our current stable of equally high-interest opportunities on USDT/USDC and gives ETH holders a chance to earn a market-beating rate of interest on their asset.
We are excited to announce the launch of our Ethereum fund, which will allow our users to earn up to 20% APY on cryptocurrency’s second-biggest asset, Ether (ETH). This adds to our current stable of equally high-interest opportunities on USDT/USDC and gives ETH holders a chance to earn a market-beating rate of interest on their asset.
Safety, as we all know, comes first and nowhere is this truer than in the realm of cryptocurrency. This fast-evolving digital economy is ripe for the picking when it comes to hackers and so keeping your digital assets safe should be at the forefront of all users’ minds. Securing your wallet, where you store your cryptocurrency, is the most important step on this journey and the first to take.
Safety, as we all know, comes first and nowhere is this truer than in the realm of cryptocurrency. This fast-evolving digital economy is ripe for the picking when it comes to hackers and so keeping your digital assets safe should be at the forefront of all users’ minds. Securing your wallet, where you store your cryptocurrency, is the most important step on this journey and the first to take.
We are thrilled to announce YIELD App’s public launch today, Friday 12 February 2021. It’s a joy to share this milestone with you, and we would like to thank our community for its incredible support during our building stages. Although this is a big moment for YIELD App, we understand that the real work is just beginning, and we will continue to keep our noses to the grindstone to achieve the many other great things we have planned.
We are thrilled to announce YIELD App’s public launch today, Friday 12 February 2021. It’s a joy to share this milestone with you, and we would like to thank our community for its incredible support during our building stages. Although this is a big moment for YIELD App, we understand that the real work is just beginning, and we will continue to keep our noses to the grindstone to achieve the many other great things we have planned.