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<div>How decentralized exchanges have evolved and why it's good for users</div>

How decentralized exchanges have evolved and why it’s good for users

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Source: Coin Telegraph

Decentralized exchanges have improved usability and user experience, becoming a good option for investors in the crypto space.

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

However, the first iterations of these platforms could 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 fulfill 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 trades directly, with tokens being taken and deposited into their noncustodial wallets.

In the past, most DEXs used order books, a system that keeps a record of all the 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 massively in popularity due to their simplicity and increased liquidity.

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

For example, if a trader wants to swap Ether (ETH) for USD Coin (USDC), they’ll 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 exchange for providing liquidity. This makes it possible for trades to be settled directly without waiting for an order to be filled.

Drawbacks of previous DEXs

Trading on a DEX initially came with several significant drawbacks, including delayed transactions, a lack of liquidity and, generally speaking, a rather terrible user experience (UX). Cryptocurrency veterans were the most common users of decentralized exchanges because they were undeterred by the do-it-yourself aspect of trading on specialty platforms, but in order for them to grow, some changes were necessary.

Trading on a DEX may be just as straightforward 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 the major cryptocurrency exchanges has significantly increased.

Are decentralized exchanges user-friendly?

Many early DEXs utilized order books, a system where users would place orders and wait for them to be filled by other traders. However, this system was not user-friendly for a few reasons. First, since it’s a decentralized exchange, users cannot store their tokens on the platform. 

Instead, they need to trade directly from their noncustodial wallets. Because of this, users need to pay gas fees every 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 is still faced by current decentralized exchanges, but the improved user interfaces make it easier to traders to place orders without making a mistake.

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

If users input the wrong value, they could end up vastly overpaying for a token. For example, the price for Token A is 0.0037 ETH per coin, and if a user mistakenly inputs 0.037 ETH for a buy order, they will pay ten times more than the actual price.

Low liquidity was another issue that was common with early DEXs. It was common for users to have to wait a long time for large orders to go through since other traders mainly provided liquidity. Modern DEXs use liquidity providers and automated market makers (AMMs) to enable traders to swap tokens almost instantly.

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

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 check as well as Combatting the Financing of Terrorism and Anti-Money Laundering checks. This process is required since the platform has regulated assets like tokenized equities and exchange-traded funds.

The most widely used type of decentralized exchange is the swap-style DEXs that grew in popularity from 2020 onwards, with platforms like Uniswap attracting both experienced and new traders. Swap DEXs use AMMs and work by the user connecting their wallet to the decentralized application (DApp), selecting the coins they want to trade and the amount they want to swap, with the tokens swapped straight into their wallet. The simplicity of Uniswaps DEX 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 within 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. While the initial process of setting up digital wallets may be tedious, users can link to the platforms via mobile apps or desktop browser extensions.” continuing:

“Connecting one’s wallet to DEXs only takes a couple of seconds, and the clean interface allows for fuss-free trading. Today’s DEXs usability closely resembles the user experience on CEXs.”

Decentralized exchanges have changed a lot over the last few years, and they continue to evolve as more projects and teams start to build within 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.

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Author: Anthony Clarke