DISCLAIMER
Respect all applicable local, national, and international laws when operating or engaging with a DeFi Exchange. Content or activity featuring, encouraging, offering, or soliciting illegal activity may be prohibited in your jurisdiction. As the Blockchain is still in its infancy, we highly advise you to DYOR and familiarize yourself with how DeFi Exchanges work as certain DeFi losses may be permanent. This article is for educational purposes only and shall not be constituted as Financial Advice.
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What are DeFi Exchanges?
Decentralized Finance (DeFi) is booming and has given the Crypto world a much better alternative when it comes to trading and earning passive income. Before DeFi Exchanges existed, all trades were made on CEXes (centralized exchanges) whereby the exchange has custody over your funds at all times and can suspend trading at its discretion. This led to DeFi enthusiasts coming up with a refined version of DeFi exchanges. Their defining feature is that they do not have custody over their user’s funds and enable them to achieve passive income other than natural portfolio growth.
Much of the DeFi ecosystem is driven through AMMs where, unlike traditional centralized exchanges, all trades are made against a liquidity pool rather than an orderbook thereby enabling automated trading.
This is made possible by the permissionless and non-custodial capabilities of smart contracts where all trades are made in a manner that the AMM never has custody of your funds. Moreover, all of this is made possible without having to rely on any third party buy/sell requests for the tokens trades. Upon initiating trades on AMMs, smart contracts automatically send these tokens to the corresponding liquidity pool and exchange them for the parallel token within the pair.
AMMs determine prices according to an algorithm that sets the prices according to the change in prices of the tokens supplied for liquidity. Liquidity pools are financed by Liquidity Providers or Market Makers who, in turn, are rewarded with a proportion of trading fees as well any staking program (if offered). Anyone can create their own token on an AMM since it is open-sourced so be sure to verify the smart contract (the contract denoting the token) before making any trades.
When depositing funds into a liquidity pool, an equal amount of liquidity needs to be supplied. For example, $10 worth of BNB and $10 worth of USDT would have to be supplied to a BNB/USDT pool on Pancakeswap. Since DeFi is open-sourced, anyone can become a liquidity provider provided they have a Web-3 enabled wallet like Metamask and TrustWallet.
How Returns in DeFi Are Calculated
Automated Market Makers incentivize users to become liquidity providers by offering a proportion of each transaction fee and free tokens.
The returns in DeFi are calculated according to its risk/reward ratio. The more the risk, conversely the higher the APR’s. AMMs with poor security reviews are likely to have higher APRs so choose wisely! Moreover, returns are dynamic which means that they are calculated according to the amount of liquidity in a particular pool. This has lead many DeFi enthusiasts to be on the lookout for the next major DeFi Exchange with lucrative APR’s, as the earlier you get in, the more the prospective returns.
What is Slippage and How Does It Function
Slippage is the deviation of the asset price and the value that is realized after the execution of a trade. It represents the setting for the amount of price slippage a trader is willing to accept. Slippage occurs when the bid/asks spread changes between the time a market order is requested and the time an exchange or other market-maker executes the order.
Having a high slippage can result in your transaction being front-run. Front running occurs where there is a delay between a transaction being submitted in a mempool for approval and its execution time. Similarly, contrary to popular belief, a low slippage can also result in your transaction failing. Therefore, be sure to keep slippage to a feasible extent.
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Downsides of Automated Market Makers
This model also has certain downsides. A high liquidity pool with a healthy amount of trades thrives and low liquidity pools often suffer from increased price impacts and slippage thereby rendering them ineffective.
Similarly, this also opens the doors towards Impermanent Losses. Such losses are concerned with liquidity pools in DeFi and are occurred when the price deviates by a given % and results in your deposited token values decreasing due to a divergence in the price of the LP tokens. Since AMM’s cannot automatically balance the exchange rates of tokens on their own, this is where arbitrageurs need to step in and create a match between the token prices of the AMM and external markets. The Impermanent losses may be erased when the token prices rebalance to the price one initially staked at hence the term ‘impermanent.’ Similarly, withdrawing from the LP pool at distorted prices can result in permanent losses.
The following image is taken from “Yield Farming Tools” which can be used to calculate impermanent losses. Simply add price changes, pool weight and the dashboard will show you the exact % of impermanent losses realized.
Calculating potential impermanent losses on AMMs can be a nuisance which is why we’d recommend using Yield Farming Tools. As in the image below, you can adjust the price changes for both sets of token pairs at your discretion and the Yield Tracking Dashboard provides you with the exact % of impermanent losses.
Best DeFi Exchanges
Now that you’ve familiarized yourself with how AMMs work and the corresponding risks of partaking in Yield Farming activities, it is important to choose an AMM that is fit for you.
AMMs initially started on the Ethereum Blockchain but riddled with the scalability and surging gas fees eventually expanded to other popular L1 protocols such as the infamous Binance Smart Chain (BSC) and Polygon.
Tutorials on AMMs
Automated Market Makers are relatively new and being a new concept, not everyone may easily familiarize themselves with the concept hence we’d recommend watching the following videos for additional information.
Whiteboard Crypto: Explained in terms of a simulated situation and its animation makes concepts easier to comprehend.
Dukascopy: A no-nonsense video that explains touches the topic at hand in a simple manner along with a brief info to Decentralized Finance.
Finematics: Liquidity pools explained and how they work on various protocols like UniSwap and Balancer.
Best DeFi Exchange on Ethereum
Ethereum has since long dominated its rankings as the protocol with the highest trading volume and UniSwap is a large contributing factor to its popularity. Coingecko indicates that the AMM’s dominance over the DeFi world is a whopping 11.4% and it is of no surprise that UniSwap’s native token, $UNI has the highest Market Capitalization in the DeFi realm.
Created in 2018 by former Siemens mechanical engineer Hayden Adams, UniSwap serves as the go-to AMM for every trader on the ERC-20 network and aims to solve the underlying problem that is associated with Dexes, i.e. a lack of liquidity. It does this by allowing tokens to be swapped regardless of relying on buying and sellers and without charging any protocol fees in the process.
UniSwap’s trading fees amounts to 0.3% (that is automatically added into liquidity reserves) and it aims to reduce this to 0.25% in the future while contributing the remainder towards protocol fees. This model has been immensely successful and data suggests that UniSwap has managed to generate a staggering $1B in fees for liquidity providers.
In case you’re getting overwhelmed by market volatility, UniSwap’s latest V3 allows traders to place order books. Moreover, addressing the common issues faced by Liquidity providers, they can now provide liquidity with upto 4000x of capital effcieicy relative to UniSwap’s V2.
Best DeFi Exchange on BSC
Pancakeswap is a clone of UniSwap and built on its source code. It allows users to trade BEP-20 tokens and partake in its non-DeFi features such as predictions mechanisms and its lottery.
The gas fees on the Binance Smart Chain is immensely lower in comparison with the Ethereum and that allows for projects to offer lucrative staking programs – this has been the reason behind Pancakeswap. The Decentralized Exchange is a part of BSC’s very own #BUIDL program and offers attractive returns – be it yield farming or its pools.
The AMM is built by a group of anonymous developers and its native token, $CAKE acts as its governance token. All of its prospective staking programs are at first run by the community and voting ratios are assigned on the basis of $CAKE held in the user’s wallet. Lastly, its trading fees only amounts to 0.2% (0.17% of which is given to LPs and the 0.03% is burned by the project’s treasury) which makes trading on Pancakeswap automatically cheaper in comparison with its biggest competitor, UniSwap and hence why it has surged in volume lately.
Best DeFi Exchange on Polygon
Balancer is an Automated Market Maker (AMM) that supports the Polygon and Ethereum networks. The exchange allows you to swap tokens on the two networks trustlessly.
Balancer has what is known as ‘Smart Order Routing’ (SOR) where smart contracts are used to automatically figure out the best rates and trading prices hence reducing trading costs and slippage. The protocol also provides you with the funds necessary to achieve the trade. This is financed through Balancer’s pool and each pool is comprised of 4 or 3 different sets of tokens, each with a unanimous or different ratio (determining on which pool you select). Participants are in turn provided with financial incentives to do so, i.e. an APR on their investments. The returns are hefty and ape-worthy so be sure to take a look as they range as high as 100%+.
Through its users of an SOR, traders manage to buy and sell their tokens at the lowest possible price by optimizing the use of liquidity pools.
Hence owing to its popularity and features, data from DeFi Prime indicates that Balancer’s users’ overtime have increased massively with a consistent increase in its user base throughout.
Best Cross-Chain DeFi Exchange
One of the biggest drawbacks of DeFi is that it isn’t interoperable (i.e. cross-compatible between different Blockchains). It is somewhat of a challenge to Yield Farm your cryptocurrency on the Blockchain of your choice (e.g. you may choose Polygon because it has a lower gas fee and is scalable) via your favourite AMM. This is where Beefy Finance comes in and operates on 5 different Blockchains (i.e. BSC, AVAX, HECO, Polygon and Fantom).
Beefy Finance is also a Yield Farming Aggregator which means it allows users to maximise their returns from yield farming. By automating its users’ investments, it also minimizes manual interaction with DeFi that can be risky in the constantly evolving world of DeFi.
The Yield Optimizer allows you to partake in any Yield Farming activities on popular AMMs on the given chain and automatically compounds your assets to maximise returns. The protocol is able to achieve this by distributing the fees within the network equally among vault participants, therefore, making it even cheaper than its rivals.
Each vault on Beefy Finance has a fee known as ‘performance fees’ that are rewarded to stakeholders. Unlike other AMMs, there are no deposit fees and only harvested rewards are subjected to it. The fee amounts to 4.5%: 3% of which is distributed back to the reward pool – awarded to BIFI holders – 0.5% to the treasury, 0.5% for the strategist that designed the vault and 0.5% rewarded to the person conducting the harvest function.
Lastly, since the platform is designed to be a Yield Optimizer, it doesn’t support trading of cryptocurrencies and is only used for Yield Farming.
Best Dex Aggregator
What makes 1inch stand out is that it is a Dex Aggregator, rather than a standard DEX. Founded by Russian developers, Sergej Kunz and Anton Bukov during a hackathon, the smart contract editing experts managed to portray to the crypto world why a Dex Aggregator is of the utmost importance.
1inch pulls prices from a variety of sources and allows you to make split trades to benefit from the most optimum prices. In doing so, it splits its orders among multiple DEXes (such as UniSwap and Khyber Network) to find the best possible market price. This is achieved by using arbitrage bots and complex algorithms.
1inch stands out from other DeFi Exchanges because it provides liquidity across multiple markets on three blockchain networks (i.e. Ethereum, BSC and Polygon). Thereby, doing so allows traders access to a larger pool of liquidity. Lastly, it also has a liquidity mining program where the rewards are given out in its native token, $1inch.
Best DeFi Exchange with Order Books
In case you’re reluctant to use AMMs and prefer traditional order books, Binance has its own version of a decentralized exchange known as Binance Dex where all trades are made through a user’s wallet. It functions similarly to how Binance itself works (as the UI is somewhat similar) but never has custody over user’s funds and relies on smart contracts for this purpose, similar to AMMs.
However, the variety of tokens available for trade on the exchange are somewhat limited and the DEX itself is built on BEP2. This means that the platform isn’t interoperable and hence you cannot deposit coins like BTC and ETH onto the network directly. To get around this, you’ll have to resort to buying coins that are pegged by Binance (such as BTCB).
Similarly, since the platform relies on an orderbook trading format, it leaves little room for earning passive income other than natural portfolio growth.
Despite its drawbacks, the DEX is much safer and secure than Binance itself as it is less vulnerable to attacks and downtime. By allowing users to trade with each other (as opposed to a liquidity pool), their assets are in their control at all times. By also benefitting from low gas fees, Binance Dex has relatively lower fees in comparison with Binance itself which makes it a great choice for those that prefer all things decentralized. The following is a screenshot of its trading interface.
To use the Dex, simply click this link, press “Trade on Binance Dex” and unlock your wallet. You can either create a wallet or use Wallet Connect or Binance Chain Wallet.
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Other Notable AMMs and DeFi Exchanges
Other popular Automated Market Makers are:
SushiSwap: Where UniSwap may have been considered as an AMM for exclusive insiders, SushiSwap holds its reputation as being community empowered. It was founded as a fork of UniSwap with its founder’s aim being to provide a DEX that rewards yield farmers with fees paid in its native token as well as a governance token. It is notable that UniSwap did not have its native token at that time.
Curve Finance: Launched in 2020 with an aim of providing immediate liquidity in its function as a Decentralized Exchange for stablecoins. Its liquidity pools are open-sourced and open to market participants.
Khyber Network: Created in 2018 and its liquidity pools are not open to everyone since they are either created by its developers or professional market makers.
Closing Remarks on Best DeFi AMMs
There are a plethora of DeFi Exchanges to choose from, each with its own unique selling point. When selecting the one that’s best for you, it’s important to track your trading/investing habits. Certain DeFi protocols like 1inch and Balancer are optimized for trading as they give you a much better market price whereas some are optimized for passive income. In the end, it all boils down to which Blockchain you prefer and the type of tokens you trade/Yield Farm. Nevertheless, keep in mind that most of the protocols in this list are still relatively new and hence partaking in their activities could result in permanent losses so chose wisely; don’t forget to DYOR before investing.
If you run a DeFi Exchange and are looking for a Digital Marketing Agency to add rocket fuel to your crypto project’s growth, then Crowdcreate is here for you. We help Cryptocurrency projects connect with influencers, users and investors and were also ranked as the #1 Marketing Agency for Community Management by Forbes. Also, Don’t forget to read our article titled “Best DeFi Influencers” where you can find a comprehensive and well-researched list of the best influencers in the market. Need to know more? Contact our team at Crowdcreate!
