What is Decentralized Finance (DeFi)? pt. 5 | DEX's & Aggregators
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DEX's & Aggregators
This is the 5th issue of "What is Decentralized Finance (DeFi)?". If you missed the first 4, check them out below. This series will also be indexed under my master index of educational crypto content (at some point) - "Learn Crypto Stuff".
The idea with this series is to educate people that are new to cryptocurrency or new to DeFi on how it works. Decentralized finance can definitely be intimidating if you've never done anything with cryptocurrency before aside from just holding or trading it. Another reason that people can find it intimidating, or confusing, is that it does require a little bit of technical know-how to get started.
Have no fear though, NiftyPhill is here to help you learn the ways of the financial system of the future! I also need to preface this by saying I am not an exert nor am I a financial advisor. I'm a guy that has been playing with cryptocurrency since 2015 and has done a ton of different things with it so I'm speaking purely from experience.
I fee like when I started this series, I jumped straight into the more complicated side of things about DeFi. I hopped straight over the very first piece to the DeFi puzzle, and I just realized it. That's what you get when you try to do too many things at once, and you forget to zoom out a bit. It's very easy to look at DeFi and forget where it started because so much happens so fast.
I couldn't let this series continue without looking at where it all started - Decentralized Exchanges (DEX's) and DEX Aggregators.
You might have used UniSwap before, or even something like Pancakeswap. Maybe not. Maybe you've only ever used Coinbase or Gemini. Maybe you've never even heard of a decentralized exchange. That's totally OK. When you want to trade between different crypto assets, you don't have to use an exchange like Coinbase. Because we have programmable money in crypto, we are able to trade assets with no middle man.
Ethereum's blockchain is where it all began, many years ago. Now you have DEX's built on tons of different blockchains like Hive, Polygon, Terra 2.0, and really any chain that supports smart contracts. Developers are able to write code that executes transactions directly on-chain without having permission from anyone. For example, you can swap ETH for any other token on the Ethereum blockchain in a permissionless, and trustless way.
With DEX's, there are no accounts with passwords that you can't remember. There's no submitting photos of your ID and Passport, or filling out any kind of information. You literally connect your wallet, and do whatever you feel like. Wanna trade ETH for Bitcoin? You can do that by swapping ETH for WBTC (wrapped BTC) and hold BTC without having to leave the Ethereum blockchain.
If it sounds complicated, it's really not. All you need is a wallet like Metamask, Trust Wallet, or even the built-in Brave Browser wallet. Once you have a wallet, you then need some crypto and you're good to go. Remember, you can use UniSwap without creating an account or anything. DEX's have evolved a lot since they first started coming out. More features like the ones mentioned above, like yield farming, started emerging pretty quickly.
With the explosion of DeFi, lots of different DEX's started popping up. Uniswap was the first one I remember ever hearing about or using. There was no way to place limit orders or anything other than a direct token A to token B swap. Then came SushiSwap and others like 1inch.exchange. 1inch.exchange was something completely different though.
1inch.exchange was the first Aggregator I ever heard about, and I think I heard about it in some random Telegram group. Back when Telegram was the hub for crypto projects, pump and dump schemes, and ICO's. I used it and I immediately understood where the need for aggregators came in. Another one I remember using was called Bancor. I don't know if it's still a thing, but I remember using it a few times.
So what is a DEX Aggregator? Well, it's exactly what it sounds like. It aggregates prices from multiple different DEX's to make sure that you are getting the best deal on your trade.
So if you were trying to swap ETH for WBTC, you would enter the amount into the aggregator and it would give you different trade amounts based on the exchange rate on that specific DEX. This happens because the price for assets can vary on different platforms. The fee to push through a transaction can also affect the difference in the result of the transaction.
This was crucial during times where the gas prices on the Ethereum blockchain were going insane. Crypto Kitties launched and there was a nuclear meltdown on the blockchain. Everything went nuts. Transaction fees were like $11. Then fast forward a few years later with minting NFTs and we saw fees hit the hundreds and thousands of dollars.
It's still great to consult an aggregator when you're doing any kind of trade. You can potentially get more for your money, save on fees, and lower the headache of doing the price checking yourself. When you're dealing with tons of different chains that are all based on Ethereum, you can have aggregators check prices across different DEX's and different blockchains.
This is where DeFi began. This is the basis for what we have today. Without DEX's there would be no DeFi. Without DeFi, there would be no yield farming, loans, and all the other crazy things we're able to do.
Post written by: @l337m45732 aka NiftyPhill.
Posted Using LeoFinance Beta
