In 2014, decentralized exchanges (DEXs) were introduced to the cryptocurrency market. They let users trade a wide range of assets directly with each other.
The first versions of these platforms, however, could be hard to use. But since they were first made, developers have worked to make them simpler and easier for users to use.
Smart contracts are used to fulfil orders placed by traders on decentralized exchanges. This lets users trade directly with each other instead of using a central platform. When traders use a DEX instead of a centralised exchange (CEX), their money is not kept on the exchange. Instead, users start trades directly, and tokens are taken from their noncustodial wallets and put into their wallets.
Most DEXs used order books in the past. An order book is a system that keeps track of all the open purchase and sale orders on an exchange. Even though order books are still used by many decentralized exchanges today, automated market maker (AMM) DEXs have become very famous because they are easy to use and have more liquidity.
AMMs utilise smart contracts and liquidity pools to enhance the liquidity of decentralized exchanges and control the price of a token each time a trade is made. When traders use an AMM-based DEX, they interact with pools of liquidity that hold more than one pair of tokens.
These pools are filled by liquidity providers, who do this work in exchange for a share of the fees made by the DEX. This means that trades can be settled right away, without having to wait for an order to be filled.
Problems with past DEXs
At first, there were a lot of problems with trading on a DEX, such as slow transactions, a lack of liquidity, and a generally bad user experience (UX). Most people who used decentralized exchanges were cryptocurrency experts who didn’t mind that they had to do everything themselves. However, in order for them to grow, they needed to make some changes.
In today’s market, it may be just as easy to trade on a DEX as it is on a centralised exchange. A lot of work has been done to improve the user interfaces, making it easier for cryptocurrency traders with different levels of experience to use them. Since decentralized finance (DeFi) came along, the amount of money on the major cryptocurrency exchanges has grown a lot.
How easy are decentralized exchanges to use?
Many of the first DEXs used order books, which let users place orders and wait for other traders to fill them. But this system was not easy to use for a number of reasons. First, because it’s a decentralized exchange, users can’t store their tokens on the platform.
Instead, they must trade directly from their wallets that are not held by a third party. Because of this, every time a user places an order, they have to pay gas fees. If they make a mistake, they lose money in the form of wasted gas. This is still a problem for decentralized exchanges, but with better user interfaces, traders can place orders with less chance of making a mistake.
Some other issue here is that early DEXs required users to type in by hand how many tokens they wanted to trade and how much they wanted to pay in ETH. For example, if a user wanted to buy 53,451 Token A for 0.0037 ETH each, they would have to type it out exactly or copy it. When users had to type in values by hand, they were more likely to make mistakes and type in the wrong numbers.
Consumers could end up paying a lot more than they should for a token if they put in the wrong value. For example, Token A costs 0.0037 ETH per coin, but if a user types in 0.037 ETH instead of 0.0037 ETH for a buy order, they will pay ten times as much.
Another common problem with early DEXs was that they didn’t have enough cash on hand. Users often had to wait a long time for large orders to go through because most liquidity came from other traders. Modern DEXs let traders trade tokens almost instantly by using liquidity providers and automated market makers (AMMs).
Today’s decentralized exchanges also have a much simpler user interface than the DEXs of the past, which were clunky and hard to use. The fact that more crypto investors used DEXs to buy low market cap coins during the 2021 bull market shows that they are easy to use.
But some decentralized exchanges have extra steps that users must take to use them. For example, users of regulated DEXs like Soma must pass a Know Your Customer” check as well as checks for “Combating the Financing of Terrorism and Anti-Money Laundering. This process is necessary because the platform has assets that are regulated, such as tokenized stocks and exchange-traded funds.
The most common version of DEX is the swap-style DEX, which became more popular after 2020. Platforms like Uniswap attract both experienced traders and new traders. Swap DEXs use AMMs and work by the user connecting their wallet to the decentralised application (DApp), choosing the coins they want to trade and the amount they want to swap, and the tokens they want to swap going straight into their wallet. Because Uniswaps DEX was so easy to use, other projects like PancakeSwap for BNB Smart Chain were inspired to do the same thing.
Experts in the DeFi space agree that modern DEXs are easier to use than their predecessors because they have better liquidity and a simpler way to trade.
Andrei Grachev, managing partner at DWF Labs told “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.”
So over past few years, decentralized exchanges have changed a lot, and they will continue to change as more projects and teams start to work in the DeFi space. As the blockchain industry grows up and decentralized finance becomes more common, DEXs will likely become even more user-friendly and easy to understand.
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