By now, you may know what a decentralized exchange (DEX) is and perhaps be looking to trial one.
There are hundreds of DEXs to choose from, each offering various features to remain competitive. However, not all DEXs are the same. The difference may stem from their service offerings and feature density.
Before settling on a DEX, salient characteristics could make your choice stand out from the rest. Therefore, it is important to do some research before deciding which one is best for you. This is crucial considering that a DEX, in its basic form, is an interface allowing users to swap tokens instantaneously without involving third parties. These platforms are driven by smart contracts, charge different fees, and deploy from various blockchains using different models. Besides, DEXs have different levels of liquidity, wallet compatibility, and incentives.
5 Things to Look For in a DEX
When looking for a decentralized exchange to use, consider the following factors:
- Trading Fees
There are over two dozen smart contracting platforms in crypto. The most common one, taking advantage of its first-mover advantage, is Ethereum. There have been improvements over the past few years with developers releasing high-performance, scalable networks such as Cardano, Solana, and others. Since DEX transactions are trustless and executed via smart contracts, a trader should always track on-chain trading fees. In blockchains like Ethereum and Solana, users must pay trading fees, even if transactions fail. At the same time, trading fees fluctuate depending on demand. Although trading fees are lower in Solana and high throughput blockchains, they can rise in cases of congestion, even causing transactions to fail. In Ethereum, trading fees are relatively higher because of the high demand, forcing miners to charge higher. However, in networks like Cardano, users will only pay fees when the swap is confirmed. Also, because of Cardano's unique design, transaction fees are lower and fixed.
Liquidity is the number of assets locked in a given protocol at any time. It is a gauge of how easily a token can be converted to hard cash or other more liquid cryptocurrencies like ETH, BTC, or ADA. A measure of liquidity in DeFi is the Total Value Locked (TVL). Several free online trackers measure, in real-time, the number of assets a given DEX manages. A trader should always connect to a highly liquid exchange. A higher TVL means the DEX is popular, and many traders prefer the platform. Liquidity is a massive consideration because it is a factor that directly affects trading by influencing what is called slippage. In a highly liquid DEX, a trader will receive almost the same amount of assets and less trading fees. However, in portals where liquidity is thin, slippage is higher, meaning a trader will find it hard to trade, getting far much less assets than they would if they had traded in liquid DEXs. Liquidity will affect the trading of large buy or sell orders. In a highly liquid exchange, a trader can efficiently execute large orders quickly without worrying about slippage losses.
- Ease of use
With DeFi exploding and commanding billions, one significant consideration is how easy it is for a user to navigate on the platform, connect, and swap tokens. Uniswap, one of the largest DEX, took off because of its minimalist landing page. A trader should always choose a DEX where he can quickly navigate and connect whenever he wants to trade. A cluttered homepage where a trader requires closing popups or cycle through pages would lead to a higher bounce rate, turning off users.
- Trading pairs
Trading pairs are assets that can be traded for each other in a DEX. Ordinarily, the more the trading pairs, the more choices a trader has. This saves valuable time since one does not need to hop between ramps. One thing to note about trading pairs is that DEXs are open source and community-driven. Because they are also guided by blockchain principles of openness, anyone can create a pool and a pair on the fly without paying listing fees. One limitation a trader might encounter is realizing that a DEX's trading pairs are directly dependent on the underlying blockchain. Typically, there are more trading pairs (tokens) in active blockchains like Ethereum than in recent smart contracting platforms. However, with interoperability, that is, the ability of blockchains to communicate and enable the transfer of tokens, traders are overcoming this hurdle. Ideally, a trader should settle on a DEX with more trading pairs and interoperability capability to easily trade tokens in different exchanges.
- Wallet Compatibility
DEXs are only as functional depending on how compatible they are with wallets. Wallets are a critical part of the crypto and DeFi infrastructure. As an interface between the trader and the blockchain, a DEX must be compatible with the most popular wallets. Most traders use non-custodial web wallets like MetaMask or Trust Wallet to connect to DEXs in Ethereum or other chains like Solana and the BNB Chain, whose systems are compatible with Ethereum's Virtual Machine. It should be noted that MetaMask and similar wallets compatible with Ethereum cannot connect to DEXs like Genius DEX in Cardano. This is because Cardano uses a different blockchain architecture demanding Cardano developers to create special non-custodial wallets for users wishing to interact with the blockchains. Popular web wallets in Cardano available for traders to connect to its DEXs include Nami, Eternl, and Yoroi wallets. They are equally agile and secure as MetaMask but only function in Cardano.
DeFi is continuously evolving, and users can be overwhelmed in deciding which DEX they can choose to safely and quickly swap tokens. The main takeaway for DEXs is that all operations are smart contracts reliant, trustless, and convenient, connecting traders all over the world. With the advantages offered, DEX traders are always free to select reliable platforms based on the above factors, especially trading fees and liquidity.