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, who act as liquidity providers staking 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 their main advantage. Digital currency enables users to keep an eye on the operation of their assets.
- Resilient. 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.
Ethereum's benefits include being an extensive, fully-operating network tested over the years, backed by a vast and loyal global community of users and builders. A post-Merge Ethereum platform is more secure and scalable and brings about greater speeds, and the decentralized network strives to get rid of third-party intermediaries such as attorneys, banks, and hosting providers. A huge community of Ethereum developers is constantly searching for better solutions to improve the underlying blockchain level.
The drawbacks: Ethereum's popularity has led to higher gas fees compared to other protocols, transaction speed is not very fast (averaging around 40 minutes per transaction), and there may be challenges for non-blockchain developers learning to build on Ethereum, especially if they're switching from centralized to decentralized networks.
Building a DEX on Binance Smart Chain
Binance Smart Chain was born in time for the DeFi movement, as 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.
Its benefits include lower transaction fees compared to Ethereum (running a dApp on BSC is roughly 3x more affordable), a Proof of Staked Authority consensus mechanism built for mass adoption and high-speed infrastructure, and full EVM compatibility, which gives it easy access to Ethereum's vibrant developer and user community — BSC's dApps are easier to transfer, create, and port over from existing Ethereum apps. BSC is also cross-chain compatible, supporting pegged coins from other blockchains.
The drawback: Binance seems excessively reliant on Ethereum, making it challenging to create something that hasn't already been done there, which slows down possible innovation.
Building a DEX on NEAR Protocol
NEAR is already on its way to being 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.
According to 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 also 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 — promising what NEAR calls "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, and 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, and its user-friendly development platform makes building decentralized applications simple, backed by a vibrant community forum.
On the drawback side, NEAR is still relatively small and not as popular as Ethereum or BSC, it lacks global support from the crypto community (including some major exchanges and wallets), and it's more difficult for NEAR ecosystem projects to get the same level of 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.