Decentralized exchanges (DEX) are a cornerstone component of DeFi due to their permissionless composability. They serve as the basis of “money LEGO” and enable developers to build more complex DeFi products on top of them.
Earlier this year, DeFi Pulse reported that DEXes make up 22% of the Top 100 DeFi applications in their rating, with the rest going to DeFi lending (28%), assets (26%), derivatives (19%), and payments (5%) dapps. So, all things considered, there is much room for growth and competition among DEXes in the DeFi space.
Let’s dig into DEX specifications and look at the best blockchains to develop and launch decentralized exchanges.
What’s a DEX and its benefits
DEX stands for decentralized exchange and is a decentralized way to trade digital assets, as it relies on user-generated liquidity pools to conduct trades. The AMM (automated market maker), a system that does away with the need for a centralized authority/middleman and instead offers a peer-to-peer marketplace that adheres to the decentralized principle at the core of crypto, is the foundation of the DEX.
DEXes operate thanks to average users. They act as liquidity providers who stake their crypto assets to a trading pair — in return, DEXes promise users an annual percentage return (APR) on their staked value. Generally, DEXes are
Anonymous. Transactions made on DEXs never involve data transmission to an intermediary, safeguarding user privacy and information. In contrast, centralized exchanges need personal information from users when they register, such as passport information and a picture.
Safe. DEXs’ increased safety is its main advantage. Digital currency enables users to keep an eye on the operation of their assets.
DEXes are great for preserving your digital assets. For instance, authorities may take all funds and user accounts if a centralized exchange ceases to operate. This cannot happen to a DEX, as it’s based on a distributed network.
Activities a DEX has to offer
When we look closely at well-known DEXes like PancakeSwap and UniSwap, we must acknowledge that they are becoming all-inclusive DeFi platforms. In addition to trading in general, users can:
- Swap their assets
- Lend their crypto
- Stake crypto assets
- Participate in yield farming
- Earn bonus coins
Even more, some DEXes offer launchpads, which are DeFi-integrated platforms for crowdsourcing the funding of new decentralized apps.
Swapping tokens
It is the simplest feature of any DEX. Token swapping is exchanging one crypto token for another without first converting it to fiat money. To illustrate, a token swap occurs when a user deposits BNB, Binance Smart Chain’s native coin, on a DEX and receives USDT in exchange.
Lending
Anyone may get into DeFi as a crypto lender. A lender can lend out their assets to others while earning interest on the loan. Moreover, lenders can receive interest for lending their crypto assets through a DEX platform. DEXes also allow long-term lenders to earn more with bigger return rates.
Yield Farming
Yield farming pays users for supplying liquidity to DEXes. The main goal of yield farming rewards is to motivate users to produce value for an on-chain protocol. In addition, users who make deposits are given a better APR on their provided liquidity because yield farmers receive rewards proportionally to their deposits in an application’s native token.
Staking
There are many types of staking in DeFi. However, to explain the basics, staking enables users to lock their tokens in a DEX in exchange for rewards in the form of yield.
Building a DEX on Ethereum vs. Binance Smart Chain vs. Near Protocol
So, how to filter out the best blockchain to develop and launch a DEX on? At INC4, we agree that the project team must pick the most suitable one for their cause, considering the speed of development, the Layer 1 blockchain’s customer base and popularity, speed of transactions, fees and the promise of scalability.
Below, we compare the average transaction speed, the fees and the number of daily active users on Ethereum, Binance Smart Chain, and Near Protocol.
Building a DEX on Ethereum
For several reasons, Ethereum is the perfect base for DeFi, where users have total financial autonomy. To this day, the Ethereum blockchain remains the most popular one for launching DeFi apps. According to Dapp Radar, 126 exchanges currently run on Ethereum.
Benefits
- It’s an extensive, fully-operating network that has been tested over the years;
- Ethereum has a vast and loyal global community of users and builders who support the development of the largest blockchain ecosystem;
- A post-Merge Ethereum platform will become more secure and scalable and will bring about greater speeds;
- The decentralized network strives to get rid of third-party intermediaries, such as attorneys who draft and interpret contracts, banks that operate as middlemen in financial transactions, or third-party site hosting providers;
- Ethereum will continue to grow and bring about new opportunities. A huge community of Ethereum developers are constantly searching for better solutions to improve the underlying blockchain level.
Drawbacks
- Ethereum’s popularity has led to higher gas fees when compared to other protocols;
- Transaction speed is not very fast on Ethereum, averaging at 40 minutes per transaction;
- There may be challenges in learning to develop apps on Ethereum for non-blockchain developers, especially if they switch from centralized to decentralized networks.
Building a DEX on Binance Smart Chain
Binance Smart Chain was born in time for the DeFi movement, as the users showed more interest in blockchain-powered financial solutions. Dapp Radar presents that there are 98 exchanges which currently operate on the Binance Smart Chain.
Benefits
- Lower transaction fees when compared to Ethereum, which means that running a dApp on BSC is 3x more affordable;
- BSC was developed for mass adoption. BSC uses the Proof of Staked Authority consensus mechanism. This gives DeFi app developers the high-speed infrastructure they need to compete with traditional software-based lending or borrowing apps.
- Being EVM-compatible, the Binance network gains easy access to a vibrant developer and user community of Ethereum. BSC’s dApps are easier to transfer, create and send existing Ethereum apps over;
- BSC is also cross-chain compatible — it supports pegged coins from other blockchains, enabling users to use various tokens on the network.
Drawbacks
- Binance seems to be excessively reliant on Ethereum. It’s too dependent on the Ethereum community of developers. Therefore it’s challenging to create something that’s not been done by Ethereum, thus slowing down possible innovation.
Building a DEX on Near Protocol
NEAR is already on its way to be fully scaled for mass DeFi adoption by ordinary users, whereas Ethereum may be years away. According to the Awesome Near tracker of NEAR-built projects, 31 DEX apps are live and operate on NEAR today.
Benefits
- According to the Messari research, the NEAR protocol “has built technology to enable transactions that are fast (~1 second), quick to finality (~1-2 seconds), cheap (less than a penny), and secure.”
- Near Protocol is in progress with implementing a “fully sharded” network, which divides the blockchain itself into smaller parts instead of just dividing up the responsibilities of the validators.
- Because of this, Near Protocol promises “infinite scalability,” as the amount of transactions on the network may increase endlessly without degrading its speed and performance.
- The Aurora L2 scaling solution enables developers to build on a fast and scalable Near blockchain with the reach of Ethereum. What’s more, Ethereum-compatible dapps can be built much more cheaply.
- NEAR has many other options for interoperability, which drives network growth and helps onboard new projects.
- Building decentralized applications is made simple for developers by the Near protocol’s user-friendly development platform. There is also a vibrant community forum where users discuss ideas and contribute to the creation of governance proposals. Developers and the NEAR Foundation are actively involved in the NEAR community.
Drawbacks
- Near is still relatively small and not as popular as Ethereum or BSC.
- Near Protocol lacks global support from the crypto community. For instance, it still lacks the support of some major exchanges and wallets.
- It’s also difficult for the Near ecosystem projects to get better financial exposure to the value they create
Ready to build a DEX with the INC4 team?
INC4 offers a wide range of DeFi services — we can improve existing blockchain solutions or create decentralized finance apps from scratch. Together with you, we will study your business request and propose the best-suited solution for developing a full-fledged DEX or its additional features! Make sure to talk to us about your idea, and we will do our best to help.
