The evolution of blockchain technology has been remarkable, and the decentralization of financial systems has been one of its most significant achievements. Decentralized Finance (DeFi) is the system that allows users to trade, invest, and earn interest on their digital assets.
Decentralized Exchanges (DEXs) are a crucial component of the DeFi ecosystem that allows peer-to-peer trading without intermediaries. DEX aggregators play a critical role in promoting DeFi adoption by addressing liquidity challenges associated with independent DEXs. This article highlights how DEX aggregators optimize DEX trading.
Challenges of DEX Trading
The transition from centralized exchanges (CEXs) to DEXs is accelerating, primarily because of the recent downfall of centralized exchange giant FTX. However, selecting the right DEX can be daunting for traders. Besides convenience and an intuitive interface, traders face several challenges that can affect their trading activity.
The problem is that most traders are unaware of some of these challenges because some DEXs do not provide sufficient information to simplify the trading process. This leaves many traders vulnerable to several risks, such as:
The risk of executing a trade at a worse price than quoted in DEXs that employ the Automated Market Maker (AMM) model is more significant than on CEXs. Prices are determined by the ratio and value of tokens stored in liquidity pools. Large transactions directly impact liquidity on DEXs, forcing the AMM to execute at a different price than the initial quote. This can be detrimental to traders. To avoid price impact, traders can split large trades into multiple pieces, but this means paying more in fees.
Price slippage is the difference between the quoted price and the execution price caused by Miner Extractable Value (MEV) attacks and general market volatility inherent to crypto assets. On CEXs, price slippage is traditionally mitigated by using limit orders. Unfortunately, in DeFi, limit order functionality is still a luxury, not a standard.
Poor Price Discovery
DEXs with low liquidity may offer unfair quotes due to poor price discovery. AMMs rely on an arbitrage mechanism to maintain prices aligned across all exchanges, but liquidity pools with fewer tokens and lower volumes can offer prices that deviate from the rest of the market.
Low Liquidity of Rare Assets
The DEX market is very fragmented due to the multitude of different platforms. This is problematic for rare assets because liquidity is dispersed across multiple pools.
Unclear Transaction Fees
Most DEXs are transparent about their standard fee, but there may be variable costs, such as gas fees, that are not fully explained by some DEX services. Some DEXs offer better rates but at high slippage, while others offer poor rates for lower slippage.
These challenges are amplified by the fact that the DEX market is fragmented, and there are multiple options to choose from, leaving traders confused. A diverse range of options is good for the market, but when it comes to an emerging sector, it is difficult to make an informed decision. Traders are often forced to transact on multiple DEXs to hunt for better rates, but they have to give permission to numerous smart contracts.
How DEX Aggregators Address Liquidity Problems
DEX aggregators are DeFi protocols that offer crypto traders access to multiple trading pools through a single dashboard. These protocols use complex algorithms to determine the best DEX for each specific token swap, taking into consideration several factors such as liquidity, price, and slippage.
One of the most significant problems faced by independent DEXs is the lack of sufficient liquidity, which can lead to price slippage and reduced trading volume. DEX aggregators address this issue by giving traders access to multiple DEXs at once. By aggregating liquidity across different exchanges, DEX aggregators offer better price discovery and reduce the risk of price slippage. They can also split orders across multiple DEXs to further reduce slippage.
YetAnotherDeFi (YAD), is an example of a DEX aggregator that aggregates liquidity across six major blockchains, including Ethereum, BSC, Avalanche, Polygon, Fantom, and Optimism. With YAD, crypto traders can exchange over 3,500 tokens at the most favorable rates with low transaction fees. The platform uses decentralized and noncustodial swap technology that is censorship-resistant and allows traders to move funds anywhere in the world without any geographic or KYC limitations.
DEX aggregators, such as YAD, prioritize user experience, making the trading process similar to that of a centralized exchange (CEX). The aggregator offers two view modes: a simple mode for beginners and another mode for experienced traders. In the latter mode, traders can access all relevant information before conducting a swap, including the price action and the optimal swap route. YAD automatically finds the fastest route and offers the best rates.
The aggregator enables users to customize the price slippage tolerance and change the gas price to accelerate certain transactions. These features offer a smooth and flexible trading experience.
Contribution to Crypto Adoption
The prevalence of hacking attacks and fund misappropriation of centralized crypto services has negatively affected crypto adoption. DEXs provide a viable alternative, but they lack the same liquidity and convenience as centralized platforms. DEX aggregators can reduce hesitancy by offering the best of both worlds.
DEX aggregators combine the major benefits of DEXs, such as noncustodial trading, with the liquidity level of CEXs, offering the best trading experience in the crypto space. By addressing liquidity issues and offering a user-friendly interface, DEX aggregators can contribute to crypto adoption by attracting more traders to decentralized platforms.
According to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute, the collapse of FTX set back the adoption of crypto assets by “one or two years.” DEX aggregators can help prevent similar setbacks by offering a safer and more convenient alternative to centralized platforms.
In conclusion, DEX aggregators are game-changers in the DeFi space, addressing the most pressing problems faced by independent DEXs, such as insufficient liquidity and price slippage. By using complex algorithms and aggregating liquidity across multiple DEXs, DEX aggregators offer traders the best possible rates and a smoother transition from CEXs. YetAnotherDeFi (YAD) is an excellent example of a DEX aggregator that offers access to over 3,500 tokens and ensures asset security through decentralized and noncustodial swap technology. DEX aggregators like YAD can play a vital role in supporting crypto adoption by providing traders with a user-friendly, secure, and efficient trading experience that combines the major benefits of DEXs and CEXs.