What is a DEX?
Decentralized exchanges (DEX) are used for trading without the need for third parties. This is the most secure type of trading in the world of crypto because your cryptocurrencies stay in your wallet. Unlike centralized exchanges (CEX), there is no risk of losing your cryptocurrencies due to their bankruptcy or regulation. You will also not get an unpleasant surprise if your exchange unexpectedly implements KYC (Know Your Customer) and limits or completely bans your withdrawals.
You can think of DEX exchanges as a combination of a simple application and protocols on the blockchain. The primary function of these programs is to make decentralized transactions between two parties. A DEX works as follows:
You connect your wallet and set up a token exchange. The program will find a counterparty and, through your wallet, asks you to approve the exchange rate and complete the transaction. After your approval, the transaction is sent to be recorded on the blockchain. If everything goes smoothly, your transaction is recorded on the blockchain within a few seconds or minutes, making the transaction valid and irrevocable.
Fees on the Ethereum network are higher than on other blockchains, ranging from several to tens of dollars depending on the demand for transaction recording.
There are several DEX exchanges on every blockchain. The two most famous on the Ethereum network are Uniswap and Sushi.
- Only you have access to your cryptocurrencies.
- You have a huge variety of cryptocurrencies to choose from.
- Anonymity / no KYC (Know Your Customer).
- Lower fees for large transactions compared to a CEX (USD 4,200 and more).
- High fees for small transactions.
- Greater slippage (the difference between the expected and actual price).
- It is more difficult to determine the market depth / the risk of exchange at disadvantageous prices, especially for tokens with low liquidity.
On Sushi, you can place Limit Orders, transfer and exchange tokens from one blockchain to another, and even stake SUSHI tokens to get a small part of profit on this DEX.
Anywhere, anytime and to anyone – these are the conditions for obtaining a decentralized loan. Approval is not decided by a banker, but by the protocol. Everyone has an equal standing, but on the other hand there is also no human approach. You apply for a loan on a decentralized application using a connected wallet.
The principle of these loans is that you put your own cryptocurrencies into the protocol as collateral. E.g., you deposit USD 1,000 worth of ETH. The protocol establishes a “maximum debt value”. This can vary, but is usually two thirds of the borrowed amount. If you borrow USD 200, everything is fine, and your debt grows at the agreed interest rate.
If things don’t go as planned and your USD 1,000 loses 70% of its value, you’re left with USD 300 in the protocol. This is the limit when your deposited cryptocurrencies (collateral) will be irretrievably liquidated – your debt has reached two thirds of the collateral value. This means that any cryptocurrency you deposited into the protocol will be used for the liquidation fee and debt settlement. The liquidation fee is usually 10% of the original amount, meaning the protocol takes USD 200 from you to pay off the original debt, and USD 100 as a fee. This situation can be avoided by increasing the value of the collateral in the protocol.
Loans tend to be advantageous at times when people don’t want to sell their cryptocurrencies but are in dire need of more. Even large companies use these loans.
Interest on common cryptocurrencies can be 2% to 8% per year. For stablecoins it can be 10% to 12%. It is also possible to use flexible (short-term) interest. This may or may not be significantly different, on both sides. The flexible interest percentage varies according to the state of supply and demand in the loan market.
The most famous protocols for decentralized loans are MakerDAO, AAVE and Compound. You should study this topic well before using them.
- Anywhere, anytime and to anyone.
- The loan arrangement speed.
- No register entries.
- Your funds (collateral) are locked.
- Liquidation risk.
- The collateral value constantly changes.
- You are relying on the protocol cyber security.
In the event of high impulsive movements up or down, liquidation of borrowed cryptocurrencies occurs. You can most often recognize this through candlestick patterns that resemble a parabola or a huge wick to places where you don’t have a chance to buy or sell. These liquidations are related to leveraged transactions and borrowed cryptocurrencies from the protocols we have written about here.
Decentralized portfolio management
An automated portfolio manager is a type of decentralized application that maintains a balanced portfolio for you. All you need is to connect your wallet and either create your own portfolio or join an already existing portfolio. You deposit your cryptocurrencies into this pool and get an LP (liquidity pool) token as proof of ownership as well as a portion of the profit from trading fees.
Think of this balancing protocol as a portfolio basket in which you have, for example, three cryptocurrencies in the following total value shares: ⅓ ETH, ⅓ UNI and ⅓ MKR. You have planned this portfolio, you understand it, and you want to keep it balanced in your chosen ratios as part of your strategy.
Yet as market prices are constantly changing, this task is almost impossible. E.g., when ETH starts to rise rapidly and leaves the rest of the market behind, your portfolio might suddenly look like this: ½ ETH, ¼ UNI and ¼ MKR (shares of the total value). At such a moment, you should sell some of your ETH and buy some UNI and MKR. This task can be automated, and a portfolio balancing protocol can help you. It will automatically transfer the cryptocurrencies in your portfolio between markets so that your portfolio stays with the set ratios.
This comes in handy when you want to reduce the risks of holding high-risk cryptocurrencies. Or e.g., if your investment strategy relies on the growth of a certain industry, but you do not know which projects will be the most successful. You can doubtless imagine other suitable uses.
The most famous protocol for decentralized portfolio balancing is Balancer. You should study this topic well before using it.
- Automated portfolio management.
- A decentralized solution.
- Profit from providing liquidity.
- Committing your cryptocurrencies to the protocol.
- The temporary losses concept.
- You are relying on the protocol cyber security.
By providing cryptocurrencies to the protocol, you become a liquidity provider. Your cryptocurrencies thus serve as a financial cushion for smoother transaction closing on your chosen application (exchange). For this you are rewarded with a share of the profits.