DeFi Series: Understanding decentralised exchanges (DEX) and infrastructure

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In our first blog of DeFi series, we introduced the new exciting crypto universe of DeFi Lending Projects. This time, we’re digging more deeply into decentralised exchanges. As explained, Decentralised Finance is a movement composed of initiatives that resemble conventional market services, offered via blockchain-built smart contracts with no need for intermediaries. Decentralised Exchange, also called DEX, is the decentralised version of exchanges used for trading activities.

Cryptocurrency exchanges are usually one of the main ports of call for investors and traders new to the crypto space, yet many of the largest crypto exchanges are centralised. Centralised crypto exchanges have risen in prominence and market value over recent years because they offer a simpler, user-friendly way to get started in crypto trading.

However, a key flaw in a centralised exchange is that all funds are held in one single entity, making it a magnet for hackers and thus more vulnerable. In 2019, Binance, one of the leading cryptocurrencies exchanges, suffered a breach in which hackers stole $40 million in Bitcoin, as well as some of its users’ two-factor authentication codes and API tokens.

A decentralised exchange doesn’t have a centralised body which takes control of users’ assets. Instead, a DEX is often developed as a decentralised application on top of a blockchain network. Within a DEX system, a buyer is connected with a seller across a liquidity pool via smart contracts controlled by an Automated Market Maker.

No profile or background information is required from users to get started on DEX; they simply connect with a wallet of their choice and can start trading so long as there is sufficient liquidity.

The popularity of DEX has increased, with growing awareness of DeFi causing an explosion in demand for services and in the amount of trade. In August, trading volume on decentralised exchanges surpassed $11 billion, indicating a growth of 152 percent month-over-month.

The growth was driven mainly by increasing activity on Uniswap, a DEX based on the Ethereum blockchain. On August 30, Uniswap even surpassed Coinbase in daily volume, reported Cointelegraph. Uniswap had a 283% volume increase that month, resulting in a total volume of $6.7 billion and breaking its previous record from July in less than two weeks.

Even centralised exchanges like Binance have noted the trend towards decentralisation and have thus started offering DEX services: Binance DEX runs on top of the Binance blockchain, allowing users to use the native Binance token (BNB) and other tokens based on the Binance chain.

“It’s always better to disrupt yourself than having somebody else disrupt you first,” said Changpeng Zhao, CEO of Binance. “I will be really happy on the day when decentralised exchanges replace centralised exchanges and I think that will push our overall mission forward,” he commented.

Decentralised Exchanges (DEX):

Curve Finance: Decentralised exchange designed for stable coin trading. Launched in January 2020, Curve allows low slippage trades, and a low fee algorithm. Currently, Curve offers seven pools: Compound, PAX, Y, BUSD, sUSD, ren, and sBTC all of which support swaps for wide variety of stable coins and assets.

Uniswap: The most popular DEX so far, a fully decentralised on-chain protocol for token exchange on Ethereum. Anyone can quickly swap between ETH and any ERC20 token or earn fees by supplying any amount of liquidity. Users can also create a market, or liquidity pool by supplying an equal value of ETH and an ERC20 token.

Balancer: Launched in March 2020, Balancer is an automated market-maker built on Ethereum for multiple tokens. It enables portfolio owners to create Balancer Pools where traders can then trade against these pools. Anyone can create or add liquidity to customisable pools and earn trading fees

Understanding infrastructure

Infrastructure is an important part of the DeFi ecosystem as it enables the development of dApps, smart contracts and services to run on top of the blockchain. The infrastructure layers involve the testing framework, scalable APIs, security for detecting vulnerabilities, decentralised oracle networks and open source frameworks.

Currently, even decentralised applications have some level of centralisation in their structure as they have to seek storage and compute solutions to keep their services working. In order to develop fully decentralised applications, they should be powered by public infrastructure. This allows for more interoperability and reduces the risk of business failures.

DeFi Infrastructure projects:

The Graph Network: Envisioned as a decentralised indexing protocol for Web3, the Graph Network is core infrastructure for Web3 — a necessary component for delivering decentralised applications with consumer-grade performance.

Nexus Mutual: Uses the power of Ethereum to offer an alternative to insurance. Members join Nexus in order to protect themselves from failures and hacks in smart contract code. Nexus offers some protection for users who want to join the DeFi movement and get returns but are afraid of the risks related to smart contracts.

0x: An open protocol that enables the peer-to-peer exchange of assets on the Ethereum blockchain as 0x facilitates the exchange of ERC20 tokens. 0x can be used by anyone to service a wide variety of markets ranging from gaming items and financial instruments to assets that could never have existed before.

DeFi is an evolving concept. Let us know your questions about the topic. Contact us via social media or at [email protected]

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