What is a DEX?
Simply put, a decentralised exchange (DEX) is a marketplace for cryptocurrencies that facilitates direct peer-to-peer transactions between crypto traders. While still relatively new in the crypto space, DEXs are already starting to seriously challenge most centralised exchanges (CEXs) if we look at number of users and transaction volume. Indeed, the DEXs have risen quite rapidly in the past 2-3 years, especially considering the fact that Bancor, the first modern decentralised exchange, appeared not too long ago in 2017.
What is the major reason for the ever growing popularity of DEXs? Many would point to the way decentralised exchanges are successfully fulfilling the main promise of crypto – enabling financial transactions without the use of middlemen (brokers, banks, payment processors or even centralised exchange platforms like Coinbase). This is made possible by the fact that most popular DEXs (Uniswap, Sushiswap) run on the Ethereum blockchain, conveniently providing a wide range of financial services directly from a compatible crypto wallet.
All my exes trade on DEXs
A regular crypto trader coming from Coinbase, Binance or another CEX, may initially find the experience of trading on a DEX somewhat confusing. DEX platforms cannot be used to execute trades between fiat and crypto, as they have been designed to exclusively trade cryptocurrency tokens for other cryptocurrency tokens. Powered by a set of smart contracts, DEXs algorithmically establish the prices of their supported cryptocurrency pairs and use liquidity pools to facilitate peer-to-peer trades directly on the blockchain itself. Liquidity pools are created by DeFi investors who lock up their funds in order to provide liquidity for the exchange. In return they periodically earn a passive income in the form of trading fees or token rewards called yield.
In contrast to centralised exchanges that utilise an order book to enable trading between buyers and sellers, DEX transactions are settled directly on the blockchain by smart contracts. A smart contract is an agreement that has been encoded into the blockchain, making it practically impossible to be breached, reneged or forged. Automated market makers (AMMs) utilise smart contracts that are custom-tailored to efficiently match crypto buyers and sellers without the need of an exchange-run order book. Because liquidity is constantly being provided by liquidity pool participants, AMM DEXs such as Bancor, Curve, Balancer, Uniswap and Sushiswap enable users to easily keep trading regardless of the overall supply/demand market volatility.
AMM trading on DEXs is a revolutionary innovation in finance that makes a case for DeFi’s continuous long-run development and growing popularity. Designed as open-source, programmable “money legos”, DEXs can be easily linked with other open-source DeFi protocols to enable new financial service functionalities. One such perfectly fitting DeFi protocol is operated by Phuture.
The Phuture of DEXs
Our platform is designed to minimise the costs of investing into crypto by utilising liquidity on Uniswap and Sushiswap. As a result, our indices can accept one-token deposits and tap into the most liquid DEXs for best execution when buying. In addition, our protocol interacts with Uniswap and Sushiswap to periodically rebalance all Phuture index products in order to maintain optimal quantities of assets in the wildly fluctuating market environment that is crypto. This way, our users not only benefit from holding a basket of diversified crypto assets in the form of a Phuture index, but also get the advantage of lower investing costs by utilising DEX-generated liquidity.