Cryptocurrency exchanges are essentially classified as centralized and decentralized. Talking about the latter, decentralized exchange (DEX) platforms operate on different blockchains, allowing for peer-to-peer transactions to take place directly between users. Unlike centralized exchanges, a DEX enables users to trade directly with one another without the need for intermediaries. It means – no need for a central authority to hold and manage assets, ultimately reducing the risk of fraud, theft, or other security breaches.
Decentralized exchange (DEX) aggregators, also known as liquidity aggregators is a blockchain-based service that unifies and accumulates exchange rates of numerous DEX platforms and shows you a list of platforms offering the best price for your crypto trades.
What Are DEX Aggregators?
When you’re just getting down with crypto, one of the very first things that you’ll probably think to do is find yourself an exchange platform – a place where you can buy sell or trade cryptocurrencies. And, in this research period, you may come across two groups of people – proponents of CEXs and avid DEX supporters.
A really simple way of looking at it is this – centralized exchanges mean exchanges (like Binance, Kraken, Coinbase) have a single, governing authority behind them – such as a company or a CEO with their designated team of people looking over and managing all of the operations of the exchange.
However, DEX platforms, on the other hand, have no single governing authority behind them. So, there’s no “company” that is providing the services, and no CEO heading it, and blame if something went wrong. You might ask how does a DEX work, then? Well, essentially, most DEXs are governed by Decentralized Autonomous Organizations (DAOs).
DEXs are where there is no central authority that has any power over the system. These non-custodial exchanges typically operate on smart contracts and are powered by automatic market makers (AMMs).
To understand it better, check out this DroomDroom article on the Role of Smart Contracts in DeFi
Now, one key thing to note is that decentralized exchanges offer varying pricing, and it is not easy to find the best crypto deal for the trading pair you are looking into.
Decentralized exchanges like Uniswap, SushiSwap, and PancakeSwap are structured in different ways, thus, sell cryptocurrencies for slightly different prices (incidentally, creating opportunities for arbitrage). It means – ETH might sell for a different amount on Uniswap than it does on PancakeSwap with each platform charging different fees.
Also, you need to consider the fact that – with the rising interest in crypto, more and more DEXs have flooded the market, and investors like ourselves often struggle to find the best possible liquidity and pricing. Right?
This is exactly where DEX aggregators come into play.
DEX aggregators are the DeFi protocols that give crypto traders and investors access to multiple trading pools in a single dashboard. Sounds interesting, right?
Source: A systematic review of decentralized finance protocols
As we know, DeFi protocols are characterized by three things: they’re interoperable, programmable, and composable. DroomDroom’s complete guide on DeFi is encompassed in this article:
Understand the world of DeFi with this recommended read on: What is DeFi?
Some of the well-known DEX aggregators are 1Inch, ParaSwap, Slingshot, and Matcha.
How Do DEX Aggregators Work?
You may visualize what a DEX aggregator really does by an analogy of a search engine. With services like Google Flights you get aggregated information from various airlines, and you can pick and choose which deal serves your preference the best.
Similarly, DEX aggregators accumulate data from a wide array of decentralized exchanges and facilitate split trades in order to offer the best possible prices. In fact, these platforms also complete numerous calculations and give users the option to perform split trades in order to achieve the best possible price of a swap.
Let’s understand the basics before the actual working of a DEX aggregator, shall we?
What Is Slippage?
At the core it is – your reality does not align with the plan.
In definition – slippage is the difference between the expected price of an order and the price when the order actually executes. It usually happens when an order is filled at an unexpected price which can be a result of volatility or liquidity. Thus, traders do take slippage into account when placing trading orders.
So, when an order is executed, a cryptocurrency is purchased or sold at the most favorable price offered by a decentralized exchange or other market maker. The results may be favorable, equal to, or unfavorable than the intended execution price.
For example, if you placed a buy order for 1 BTC at $27,000 and it was filled at $26,800, then your slippage would be $200. In this case, you received a better buying rate due to slippage.
Who are Automated Market Makers in DEX Aggregators?
An automated market maker allows traders to buy and sell certain coins using an algorithm that dictates how expensive something should be based on how much of it there is. Basically, it is supply and demand principles except it’s using an algorithm.
According to CoinDesk, Uniswap became the first decentralized platform to successfully utilize an automated market maker (AMM) system in 2018.
The centralized exchange usually oversees that trading orders are matched and is more or less the middleman between traders to match users’ buy and sell orders in record time. On the other hand, DEXs replace these order-matching systems and order books with autonomous protocols called AMMs.
Traders use crypto arbitrage trading techniques that involve buying low and selling high on exchanges and taking advantage of price differences.
You can learn more about the crypto arbitrage trading in this article.
Now, coming back to how DEX aggregators work, well, these platforms are able to offer the best trading rates by sourcing liquidity from various DEXs as well as through optimizing slippage, swap fees, and token prices.
Then the DEX aggregator, like 1Inch for example, has an algorithm that analyzes the data relating to what tokens you want to swap, taking into account: the current market prices, slippage, price differences between different DEXes, liquidity, trading fees, and more.
DroomDroom has compiled a list of the top 10 DEXes to watch out for in 2023, read the article here.
Ultimately, it will show you the route containing the best outcome, involving the combination of DEXes and trades to execute your exchange. Sometimes the best outcome may be to split the order among different DEXes. Therefore, the aggregator may use one, or more DEXes simultaneously because it will be the most profitable.
What Are The Benefits of Using DEX Aggregators?
One of the biggest advantages of DEX aggregators is that you can access a deeper pool of liquidity by trading on multiple exchanges using a single trading dashboard. These search engines of the DeFi landscape scour DEXs for the best deals so that you can swap your crypto assets with the lowest of fees. Some of the benefits of using DEX aggregators are:
- Access to the most competitive pricing across a number of DEXs
- Saving money by reducing slippage
- Investors can save time by not having to manually navigate numerous exchanges
- As these platforms use smart contracts to execute trades, it reduces transaction fees
Limited market liquidity hinders the interests of institutional investors and individual traders and DEX Aggregators address this concern.
What Are Some of The Best DEX Aggregators?
Many market exploits that exist in traditional finance can be more pronounced in DeFi, so the DEX aggregator’s algorithm may work to be able to optimize them. Here we have compiled a list of some of the best DEX aggregators across major blockchains (it is subject to change):
1Inch
1inch is a DEX aggregator founded by Sergej Kunz and Anton Bukov during (out of all the places) ETHNewYork’s hackathon in 2019. The list of DEXs it draws on includes Uniswap, 0x, and Balancer, while it also includes 1inch’s own liquidity protocol, formerly known as Mooniswap.
The 1inch API v5, Pathfinder offers asset exchanges at the best rates on the market by finding the most efficient paths for a token swap, able to split between different chains and even different market depths within one protocol in the shortest possible time.
ParaSwap
ParaSwap DEX aggregator sources their liquidity from leading DEXes such as Uniswap, Balancer, Curve, Kyber, besides ParaSwapPool – its Market Maker network. ParaSwap is a free-to-use platform and users can interact with it directly on the ParaSwap interface or through wallets such as Argent, Monolith, and Metamask.
ParaSwap protocol offers support for BNB Chain, Ethereum, Optimism, Arbitrum, Fantom, Polygon, and Avalanche.
Matcha
Developed by 0x Labs, Matcha plays the role of a decentralized exchange (DEX) as well as a DeFi aggregator. Its new iteration was released in 2023 which incorporates several features focused on enhancing the trading experience for users.
Matcha showcases transparency by displaying all trading costs upfront and doesn’t keep the difference between the quoted and realized prices of trades.
Orion Protocol
Orion Protocol is an open-source decentralized blockchain platform that acts as a DEX aggregator for CEXs & DEXs.
Recommended read: Decentralized Exchanges Vs. Centralized Exchanges: Unraveling the Top Differences
Orion Protocol was created to collect liquidity from a great variety of exchanges across the board so that investors can get the best rates and lowest fees for their trades. It is based on order books, so when an order is made, the aggregator immediately searches for multiple routes until it delivers the most suitable trading rates.
Conclusion
The interest in DeFi has been increasing. Decentralized exchanges constantly change pricing, and thus it is not easy to come across a financially advantageous deal DEX aggregators allow investors to make informed decisions about their trades and coin swaps. These aggregators combine the major noncustodial benefits of DEXs with the liquidity level of CEXs, offering the best of both worlds in the crypto space. The fact that DEX aggregators depend on sophisticated algorithms to consider various aspects while picking the best pricing for a specific token swap, is what makes it valuable.
