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Decentralized exchanges (DEX) first appeared in the cryptocurrency industry in 2014, allowing users to trade a large number of peer-to-peer assets.

However, early iterations of these platforms might be difficult to use. But, since their inception, developers have worked to make them easier and more accessible for users.

Decentralized exchanges work by using smart contracts to execute orders placed by traders, allowing users to trade directly with each other instead of relying on a centralized platform. Unlike a centralized exchange (CEX), when traders engage with a DEX, their funds are not stored on the exchange. Instead, users initiate transactions directly, with tokens taken and deposited into their non-custodial wallets.

In the past, most DEXs used order books, a system that keeps a record of all open buy and sell orders placed on an exchange. While many decentralized exchanges still use order books today, Automated Market Maker (AMM) DEXs have grown enormously in popularity due to their simplicity and increased liquidity.

AMMs use smart contracts and liquidity pools to improve the liquidity of decentralized exchanges while managing the price of a token each time a trade is made. When traders access an AMM-based DEX, they interact with liquidity pools that store multiple pairs of tokens.

For example, if a trader wants to trade Ether (ETH) for USD Coin (USDC), they will interact with a pool that stores equal amounts of both tokens.

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These pools are filled by liquidity providers who earn a portion of the fees generated by the DEX in return for providing liquidity. This allows trades to be settled directly without waiting for an order to be filled.

Disadvantages of Previous DEXs

Trading on a DEX initially had several significant downsides, including delayed transactions, lack of liquidity, and overall a pretty terrible user experience (UX). Cryptocurrency veterans were the most common users of decentralized exchanges as they were undeterred by the DIY aspect of trading on specialized platforms, but for them to grow some changes were needed.

Trading on a DEX can be as easy as trading on a centralized exchange in today’s market. A significant amount of additional work has been done on the user interfaces, making them easier to use for cryptocurrency traders with varying degrees of expertise. Since the emergence of decentralized finance (DeFi), the level of liquidity on major cryptocurrency exchanges has increased significantly.

Are decentralized exchanges user-friendly?

Many early DEXs used order books, a system where users placed orders and waited for them to be filled by other traders. However, this system was not user-friendly for several reasons. First, since it is a decentralized exchange, users cannot store their tokens on the platform.

Instead, they must trade directly from their non-custodial wallets. Because of this, users have to pay gas fees each time they place an order, so if they make a mistake, they lose money in the form of wasted gas. This is a problem that current decentralized exchanges still face, but improved user interfaces make it easier for traders to place orders without making mistakes.

Another problem is that early DEXs required users to manually enter the number of tokens they wanted to trade and the price in ETH. For example, if a user wanted to buy 53,451 A tokens for 0.0037 ETH each, they would type it in exactly or copy it. Having to manually enter the values ​​made big finger mistakes more likely to occur, users entering the wrong values.

If users enter the wrong value, they could end up paying way too much for a token. For example, the price of Token A is 0.0037 ETH per coin, and if a user mistakenly enters 0.037 ETH for a buy order, he will pay ten times more than the actual price.

Low liquidity was another common problem with early DEXs. It was common for users to wait a long time before large orders were placed, as other traders mainly provided liquidity. Modern DEXs use liquidity providers and AMMs to allow traders to trade tokens almost instantly.

Today’s decentralized exchanges also use a much more minimal user interface, which differs from the clunky and convoluted order book style DEXs of the past. The user-friendliness of modern DEXs is also evident by the greater number of crypto investors using them to buy low-cap coins in the bull market of 2021.

However, some decentralized exchanges have additional requirements for users to access them. For example, regulated DEXs like Soma require users to complete a Know Your Customer verification as well as Anti-Terrorist Financing and Anti-Money Laundering verifications. This process is necessary because the platform has regulated assets such as token stocks and exchange-traded funds.

The most widely used type of decentralized exchange is swap-style DEXs which have grown in popularity as of 2020, with platforms like Uniswap attracting both experienced and new traders. DEX Swaps use AMMs and work by the user connecting their wallet to the Decentralized Application (DApp), selecting the coins they wish to trade and the amount they wish to trade, with the tokens being traded directly into their wallet. The simplicity of Uniswaps DEX has spawned similar projects like PancakeSwap for BNB Smart Chain projects.

Modern DEXs are easier to use than their predecessors, with better liquidity and a simpler trading interface, and experts in the DeFi space agree.

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Andrei Grachev, Managing Partner at DWF Labs – a Web3 investment firm – told Cointelegraph: “DEXs are much more user-friendly than before. Although the initial process of setting up digital wallets can be tedious, users can log into the platforms through mobile apps or desktop browser extensions. keep on going :

“Connecting your wallet to DEXs takes just seconds, and the clean interface allows for hassle-free trading. The usability of today’s DEXs closely resembles the user experience on CEXs.

Decentralized exchanges have changed a lot over the past few years, and they continue to evolve as more projects and teams start to build in the DeFi space. As the blockchain industry matures and decentralized finance continues to grow in popularity, we can expect to see DEXs become even more intuitive and easier to use.