Cover Product Spotlight: Compound Finance
A spotlight article on Compound Finance with its features, financials, & security record.
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A quick introduction to different Decentralized Exchanges and Initial DEX Offerings.
Decentralized Exchanges (DEXs) are at the heart of Decentralized Finance (DeFi). They offer unprecedented freedom and flexibility to those who either cannot or don't wish to use Centralized Exchanges. DEXs allow people to trade their chosen tokens more easily, without having to go through lengthy verification processes or trust a third party with custody of their tokens or digital assets.
There are a few different types of DEXs:
Automated Market Makers: These use smart contracts to manage liquidity. AMMs can be very fast and efficient if they have a high Total Value Locked (TVL). However, when they have lower liquidity, this can lead to problems, including significant slippage on trades.
Order Book DEXs: Similar to centralized exchanges, order book DEXs use a traditional list of orders. This could be blockchain-based or off-chain. Off-chain order books are often faster but they make the exchange less decentralized.
Aggregator DEXs: Aggregators such as 1Inch give their users access to liquidity from several different DEXs, helping them find the best trading opportunities with the lowest slippage at any given time.
Some DEXs operate across multiple chains while others focus exclusively on one chain, such as Ethereum. Before the launch of Layer 2 solutions for Ethereum, trading on DEXs was often slow and expensive because peaks of activity would be accompanied by an increase in gas fees. Only those with a lot of currency to invest or trade were able to participate because trades could cost hundreds of dollars to carry out.
Today, that's changed, thanks to the existence of Layer 2 solutions such as Arbitrum. Some of the most popular DEX platforms offer support for Arbitrum, including:
SushiSwap (now shortened to just 'Sushi') and UniSwap are some of the most long standing DeFi exchanges. Today, there are others that offer more user-friendly UIs, such as Curve. However, it's hard to beat the diversity available on the older platforms. Arbitrum has rapidly gained popularity in the DeFi space, offering fast and affordable transactions by rolling up multiple trades into one transaction.
The popularity of DEXs is hard to deny. While they still lack the user figures and trading volume of some CEXes, like Binance or Coinbase, they offer lower fees, support a wider variety of coins and tokens, and have gradually built up to around 5% market share. This figure is likely to grow as users in certain countries see themselves shut out of CEX platforms due to increasingly harsh trading regulations.
There are some challenges for DEXs to overcome. Interacting with most DEXs requires an understanding of self-custody and knowledge of how the different tokens the trader is interacting with actually work. Otherwise, there may be pitfalls, such as sending a token purchased on, say, Binance Smart Chain to an Ethereum address potentially losing the funds.
Users of Centralized Exchanges may occasionally run into those same pitfalls. However, if they keep their funds on the exchange, they're less likely to run into those issues. Of course, leaving funds on an exchange creates additional counterparty risk. Learning how to use a DEX offers the freedom, flexibility, and assurance of self-custody that many people are coming to appreciate.
Over the years, we've had many ways to fund the launch of new cryptocurrencies. The Initial Coin Offering (ICO) craze is perhaps the most well-known. However, because ICOs were run via the developer's own websites, it was difficult for users to know whether or not they were being scammed. According to one report, 80% of ICOs during the initial boom were scams.
IDOs, or Initial Dex Offerings, are an alternative to ICOs that offer an additional layer of reassurance for traders. Instead of participating in an ICO, traders can lock their tokens up in a smart contract on the DEX, and those funds will be released to the developer when the new token launches. It's a safer and more transparent way for traders to invest in new tokens, and for the developers of the tokens to show that they're trustworthy.
IDOs are often announced on the website or social media channels of the project in question, and you may also find them advertised within DEXs themselves. If you're considering taking part in an IDO, do some due diligence on the token before investing, and think carefully before linking your wallet to any unknown website. Remember, no legitimate project will ask for your private keys as part of the investing process.
An IDO that takes place on a legitimate, well-known DEX carries lower risk than a traditional ICO. However, there are still risks; not all projects succeed, even if they are not scams. In addition, locking up funds in a smart contract presents some risk because smart contracts can have bugs or be hacked. When deciding whether to invest and how much to invest, consider those factors carefully.
One way to protect yourself from the risk of hacks when trading on DeFi platforms is to purchase cover from a DeFi insurance protocol. Parametric cover policies offer peace of mind that your digital assets are protected against the risk of smart contract hack.
If you're interested in learning more about DeFi insurance or are considering making your first foray into the world of Decentralized Exchanges, take a look at the cover pools in the Neptune Mutual marketplace on Ethereum and Arbitrum, which include popular DEXs such as Sushiswap, and consider acquiring cover to protect your investments. Cover, protect, and secure your assets with Neptune Mutual.