DeFi Exchange Platform: A Comprehensive Guide for 2024

Decentralized finance is an extremely competitive ecosystem where new projects struggle to retain users while the old guard has to work extra hard to continue growing. Scaling is the name of the game in this environment. DEXes are focused on accumulating liquidity: the more, the better. For some projects, it means continuously increasing rewards for staking and maintaining a certain level of prestige to keep crypto enthusiasts engaged.

The expansion of the blockchain industry throughout the last decade served as a catalyst for various decentralized protocols. Their number is close to 1,400 in 2024 and many of them show impressive performance metrics. While the vast majority of projects do not have a strong audience, the existence of many useful tools in the sector instills hope in those who root for the global adoption of digital currencies as a viable replacement for fiat.

How to use a DeFi exchange?

During the early days of blockchain technology, users had to visit peer-to-peer marketplaces like simple forums and social media groups to buy and sell their coins. Trading volumes were laughable and user activity was very low. For example, in 2010, the total supply of Bitcoin was less than 2.15 million with average prices barely reaching $0.003.

When the crypto community expanded and the number of serious investors went up, many developers realized that there was an enticing market emerging outside of the tradfi fintech sector. The first attempts at creating functional platforms were shy and small with projects like Mt. Gox and VirWoX attracting pioneer investors. However, these services were poorly designed and did not have robust security measures in place leading to the eventual hack of the Mt. Gox exchange.

Centralized exchanges started appearing soon after. Some of the most notable companies are crypto.com, Coinbase, Binance, and others. These were often privately owned corporate entities that did not take advantage of the features that made blockchain unique and resistant to hacker attacks. These platforms also suffered from theft. The most famous cases are FTX ($611 million stolen from user balances) and Bitmart ($196 million drained through Ethereum and Binance Smart Chain).

Many crypto enthusiasts started talking about using decentralization as a protection against such events. The problem is that many DEXes are also suffering from vulnerabilities that can be found in smart contract designs. The biggest problem for many projects is the weakness of bridging technologies powering cross-chain transactions. These multi-chain protocols have lost over $1 billion in user funds in 2022 alone.

Using these new protocols is not challenging even for newcomers since many development teams are strongly focused on delivering a satisfying level of user experience comparable to what you can expect from an established centralized platform. In many cases, you only need to connect your wallet (i.e. MetaMask for most Ethereum-based protocols).

What can we derive from all the statements about?

1. Contemporary users of DEXes must be aware of technological risks and make sure that their holdings are protected. It is important to work with time-tested protocols, create security backups of wallets, and never connect them to unfamiliar platforms.
2. Decentralization is not a panacea for the security issues. Projects like Wormhole, Nomad Bridge, and Multichain have all suffered from various exploits and hidden vulnerabilities. If you are not ready to focus on safe self-custody, working with CEXes can be a better choice.

DeFi platform advantages

It is quite easy to spot all the benefits afforded by these advanced projects to a regular investor. Despite their weaknesses, these are the most promising solutions in the world of finance that can dramatically impact the global economy and change the way we all understand and use money. The user growth is indicative of that with the number of active wallets increasing by 280% in the Q1 of 2024.

Let’s talk about some of the upsides:

• Accessible financial services. The World Bank estimates that roughly 1.7 billion adults remain unbanked or do not have access to any type of financial service. In many parts of Africa, people use mobile phone balances as alternatives to payment systems. Decentralization can make valuable financial services like international remittances accessible to a wider audience.
• Comparatively low costs. You can expect to pay 1% — 5% in fees when using traditional institutions like banks, brokerage service providers, and payment systems. Compare this number to a typical commission on most layer 2 protocols deployed on Ethereum where transactions cost less than 0.5% with some of the lowest fees dropping to just 0.1%.
• Full transparency. One of the biggest advantages of decentralized public ledgers is that you can easily verify any interaction with the network. In some sense, this is useful in reducing fraudulent activities and increasing trust between market participants.
• High-yield earnings. Since the competition is so fierce in this sector, all DEXes have to fight over their audiences by offering lucrative deals. For example, you can stake ETH on LIDO for 3.2% APY or DAI on MakerDAO for up to 8% APY. These are incredibly good numbers compared to savings accounts in US banks (0.05%) or even US treasury bonds (4.11%).
• Innovative products. Some of the investment opportunities that exist in this sector are simply not present in tradfi. Automatic market-market making, liquidity mining, liquid staking, and other forms of capital allocation with a huge potential for outstanding earnings make many protocols a desired destination for all sorts of investors.

DeFi platform disadvantages

While some may think that using these protocols is the best way to park your capital in the long term, investors must be cautious and consider a variety of risks strongly associated with using decentralized exchanges.

Here are some notable downsides:

• Weak security. The issue of safety is critical for the success of the ecosystem. Estimated differ, but news cycles were buzzing with the story about more than $3 billion stolen in total from bridges and other types of Dapps. Smart contract design processes must be improved and tools like external audits involved to reduce the severity of hacker attacks.
• Poor user experience. Binance Research specialists conducted a survey revealing that 18% of DeFi users have lost their money due to making a mistake when sending funds to another address. Unintuitive interfaces, overly complex transaction processing, and other factors negatively impact users and may lead to problems with asset liquidation.
• Nothing is regulated. If you lose money to fraud, there is no path for legal recourse. Once assets are transferred to another address, they are lost forever. The lack of any protection for individual users is considered very concerning by at least 60% of the audience, according to a survey conducted by Elliptic in 2022.
• Extreme volatility. The vast majority of tokens fluctuate in unexpected ways. Investors also can take out their capital if they feel uncomfortable. TVL has been declining and increasing by large margins (up to 70% per year) making it hard for regular folk to identify opportune moments to enter a position on a yield farming platform.
• Liquidity issues. Despite trying their hardest to facilitate trading in a way that satisfies all participants, up to 25% of all DeFi users (as revealed by a study conducted by Messari) have experienced slippage or transaction errors while using DEXes and bridges.

DeFi risk management

When interacting with any project in this sector, investors must be acutely aware of possible losses that can occur due to vulnerable smart contracts or market volatility. Many adventurous capital holders also engage in strategies that are outrageously risky. For example, it is possible to layer stakes by going to a liquid staking platform like LIDO, receiving stETH in exchange for ETH that will continue generating rewards, borrowing USDT against stETH, and locking in stablecoins in a pool on Aave V3. In total, this scheme would yield you roughly 7% APY.

All these machinations may seem like a relatively safe investment since you don’t actively trade or otherwise engage in risky activities. However, you are exposing the portfolio to multiple layers of risk with each threatening the whole underlying position on LIDO.

To avoid such complications, consider the following simple tricks:

• Keep your distance from overexposure. It is possible to achieve exorbitant yields on some investments, but a 64,000% 30-day average return on MEEGLES deployed on the Base network is barely worth the risk of losing everything you invest in. The same goes for layering stakes in the example above.
• Use delta-neutral positions. The world of crypto has a lot to offer. You can find excellent hedging instruments like futures to protect long-term positions on PoS networks. For example, if you have a sizeable ETH stake, short-selling it on the futures market could be a good way of protecting locked-in holdings from price fluctuations.
• Be very cautious with leveraged farming. Taking on debt is never a good idea. However, if you want to amplify gains by borrowing additional tokens, make sure to account for interest payments when calculating potential profits. In some cases, borrow APYs can be quite high and completely nullify all returns from a leveraged position.

The best DeFi exchanges

With over 1,390 tracked DEXes, finding a good protocol for trading activities can be quite hard even if you have some solid experience. We decided to put together a list of decentralized protocols focused on asset swapping. We will also compare several interesting protocols by several different metrics.

DeFi exchanges overview

Moving the spotlight onto the biggest DEXes is not the most efficient approach to making a good summary of the projects in the decentralized finance sector. Instead, we will pick interesting platforms that have unique offerings or noteworthy products.

• Balancer. This project is strongly focused on AMM development with its suite of instruments specifically tailored to allow for the quick creation and deployment of Dapps streamlining automatic market-making. As of the time of writing, the protocol supports 9 blockchains including Ethereum, Arbitrum, Base, Optimism, Polygon, and Avalanche. The TVL in August 2024 is $772 million across 3,600 multi-sided pools with APRs ranging from 0% to 125%. One of the most profitable ones is BAL/wETH pair with an impressive 45% APR.
• Aerodrome Finance. Base is often cited as one of the most progressive chains out. Aerodrome is the central liquidity hub for the whole network. It is a noteworthy project due to its lucrative incentives that rival ORCA in terms of generosity. The DEX itself is designed to operate within the Base ecosystem and provide quick transactions between individual traders. You can invest in 237 tracked pools with an average yield close to 55%. The biggest one is WETH/USDC with a 30-day average APY around 19.9%.
• DeDust is the biggest DEX on The Open Network. TON has been on the rise recently thanks to its innovative marketing techniques like releasing crypto games for Telegram users and more. As the public interest in TON started growing, the DEX also became one of the prime destinations for retail traders intrigued by high yields and the ability to work on a new blockchain. DeDust has a $226 million TVL, 64 different pools, and an average APY close to 11.8%. It also has one of the best stablecoin pools for USDT which brings in 1.68% as base APY and 22.77% in TON rewards. The 30-day mean average was 45.09% in August 2024.
• Ambient Finance on Scroll is an alternative to DeFi protocols focused strictly on mainstream networks. Ambient supports Scroll, Ethereum, Blast, and Canto. The main selling point of the platform is its smart contract design where automatic market-makers are integrated into the code as light-weight data structures instead of being separate smart contracts. In theory, this architecture makes transactions faster and cheaper with Ambient reporting significant savings on gas fees. Ambient has $98 million in TVL with the bulk of value represented by ETH holdings (over 62% in August).

These are interesting options that an investor should explore if they are seeking new opportunities in the DeFi sector. However, the biggest DEXes are way more exciting for readers because of BIG numbers.

Top DeFi platforms comparison

Let’s take a look at various metrics of three different decentralized protocols that offer self-custodial exchange services to their clients. The table below contains information that was relevant in August 2024. This comparison is made strictly for the sake of entertainment and education. Do not use this data as a form of financial advice. The best pool is chosen based on TVL and APY.

Uniswap has a massive 13.5% market share and it shows in these numbers that dwarfs the next biggest competitor Curve. It is the most popular destination for people seeking reliability and stable prices. However, yields are comparatively low, and many investors actually lose money by staking due to impermanent loss and inconsistent APYs. On the other hand, Pancakeswap is often cited as the most profitable protocol in terms of yields.

One of the best DeFi exchange strategies that you can use is to get some first-hand experience with as many platforms as possible to determine if they deserve your investments. With over 1.3K different protocols, it can be a real challenge. Consider sticking to those projects that managed to attract financing and have sizeable TVLs.