DeFi & DEXs In Simple Terms
DeFi is the abbreviation of the term decentralized finance. DeFi experienced an initial boom in 2020 and has consequently experienced another massive bull market in 2021! There are many use cases and interpretations of DeFi in the Crypto economy.
At the heart of DeFi is the ability to transact and acquire financial services without needing traditional services such as banks and credit providers. Users interact with a smart contract empowered service, utilizing a non custodial wallet as the means to authorize and perform transactions.
DEXs on the other hand are merely a way for users to buy, sell and trade tokens. A “Decentralized Exchange” is safer in that once again, transactions are taking place via a smart contract. What this means in simple terms is that the exchange does not take possession of the funds but rather executes a swap and then returns the desired coin or token back to the wallet that initiated the transaction. This is a very attractive option to Crypto holders as exchanges are known to get hacked from time to time and utilizing a DEX decreases that risk significantly.
There are numerous resources available that offer statistics about various DEXs and projects built on base layer DeFi enabled networks. Metrics such as TVL, which stands for “total value locked” and market cap are available for users to peruse. Users and potential users are able to see where projects rank and how well they are actually being utilized.
DeFi Resources
One can also check if a particular project has been audited, so as to determine if there are any flaws in the code that could be potentially manipulated by hackers to exploit the contract. Polygon Daily is actually a Twitter account that details what is happening in the world of Polygon DeFi, as well as Polygon in general. Defistation is dedicated to Defi projects built on BSC, otherwise known as Binance Smart Chain. Defi Pulse is the Ethereum focused DeFi metrics resource, while Solana Beach is focused on DeFi projects built on Solana. Cardano and BCH are also incorporating smart contracts, which will ultimately spark a fresh DeFi wave across these two ecosystems.
What Exactly Is An AMM?
An example of a popular or well known AMM is PancakeSwap, which runs on BSC and enables swaps between BEP20 tokens. Any token running on BSC will inevitably be a BEP20 token. An automated market maker (AMM) provides a service which enables the swapping of tokens in a unique and decentralized way. Traditional exchanges connect potential buyers with sellers in order to facilitate and execute a trade. AMMs on the other hand enable trades via a liquidity pool. These pools receive capital from liquidity providers in order to facilitate trades and operate in a decentralized manner, unlike centralized exchanges.
Liquidity providers in turn then receive compensation from the fees charged to perform the trade/swap via the automated market maker. The provision of liquidity takes place through farming pairs and staking vaults. In essence, automated market makers keep the DeFi ecosystem alive, without which the entire ecosystem and economy would collapse.
What Makes Trading On DEXs So Appealing?
The most attractive aspect of DeFi and decentralized exchanges has to be the self custody of funds! Utilizing centralized exchanges removes coins and tokens from your own personal custody and places them in the custody of the exchange. What this ultimately means is that the exchange has now taken over possession of your Crypto. Provided you can trust the applicable third party exchange makes all the difference though. However, exchanges can suffer hacks and other exploits, leaving your coins in a permanent state of vulnerability.
A decentralized exchange on the other hand, only removes custody from the holder for a few seconds at most. This time is obviously required in order to actually facilitate the transaction or swap. Custody is quickly regained by the holder in the form of the new coin or token that they have chosen to receive.
Some Top DEXs To Explore
PancakeSwap – Top BSC DEX/AMM with great yield opportunities.
Biswap – BSC DEX/AMM that pays you to trade!
Raydium – Top Solana DEX/AMM
Uniswap – Top ETH DEX/AMM
Decentralized exchanges are also susceptible to risk, especially if you are providing liquidity for pools and have surrendered custody of your funds in order to generate yield. Exploits, rug pulls and impermanent loss always need to be considered when providing liquidity.
