The DeFi market has been rapidly expanding and thriving to bring the latest innovations to the table. DEX Aggregators are one of them. Most traders prefer to use these DEX aggregators — to get better access to liquidity and pricing.
The cryptocurrency market has witnessed an immense rise in recent years. The trade volume has been significantly increasing as many giant companies such as Microsoft, PayPal, Starbucks, Gucci entered the market lately. Although Centralized Exchanges are preferred by new traders, Decentralized Exchanges are seeing more popularity. With the vastness of Decentralized Finance increasing, it opened new doors for DEX aggregators to benefit crypto users.
But, what is a DEX aggregator? How does it work? Let’s understand more about it and how investors and traders can benefit from it in this article.
What is a DEX Aggregator?
DEX is an abbreviation for Decentralized Exchange — built on blockchain technology enabling greater security. The only challenge these decentralized exchanges face is — the lack of liquidity for smaller tokens and pricing.
To solve this particular issue, DEX Aggregators are created. These aggregators are also called Liquidity Aggregators.
In simple terms, DEX aggregators are the financial protocols which give traders/investors — an easy access to various trading pools using a single dashboard. They rely on a complicated algorithm taking into account multiple factors before selecting the best possible provider for a — specific token swap across the available platforms.
DEX aggregators have become an essential service, with cryptocurrencies becoming mainstream and decentralized exchanges picking momentum. KyberSwap — is one of the top DEX aggregators that gives the traders better rates enhancing liquidity with dynamic fees.
Evolution of DEX aggregators
The first DEX aggregator was created as part of a hackathon competition in 2019. At the time, most participants felt that aggregated information from various decentralized exchanges was necessary. Sergej Kunz and Anton Bukov built a DEX aggregator in the span of 18 hours during a ETHGlobal hackathon in 2019 which later served as the foundation for today’s — 1inch. Even though the first version was not completely functional then — it set an example of why DEX aggregators were necessary as a blockchain-based service.
Since then, the era of DEX aggregators began and has since continued to rise. With the crypto and blockchain revolution in personal and enterprise finance, DEX aggregators hold great value allowing investors — to make more informed decisions on their trades and swaps than ever before. Currently, these aggregators are most popular among the high-volume traders, while the retailers continue to manage things with DEXs directly.
DEX vs DEX aggregator
Decentralized exchanges (DEXs) have seen a significant adoption since their inception. Even though DEXs and DEX aggregators are a bit similar, they are far different from each other. Even though both are built on blockchain technology — their functions are quite distinct. Both the platforms facilitate trade and investing but in their own different ways.
The only difference between DEX aggregators and DEXs is that — DEXs do not provide its users with the option to liquidate. But DEX aggregators are created to solve the very same issue. These liquidity aggregators provide its traders or investors with the opportunity to source liquidity from across various DEXs. On the other hand, they also offer the best rates for token swaps, which DEXs cannot provide. However, DEX aggregator integrations are often profitable to DEXs as they make way for additional users and volume.
Why use a DEX aggregator?
With the growing popularity for DEXs and decentralization where tokens can be exchanged directly without any intermediary, it wouldn’t be a surprise to see more and more projects launching their own DEXs soon. Out of them choosing the genuine project can be a difficult task for most of the retail investors.
Adding to this, the price variation of the automated market maker (AMM) based DEXs could be another issue. Often the liquidity pools may not be liquid to support big trades too.
DEX aggregator is an innovative solution that can solve these problems — by providing a single point of access to all kinds of DEXs. They can provide users to find better prices, trade pairs, and other information to make an informed decision hassle-free. This is why many traders prefer DEX aggregators.
Now, let’s have a look at how these aggregators work to understand things even better with an example.
How do DEX aggregators work?
DEX aggregators are built on top of the existing DEXs, similar to how layer-2 solutions are built on top of blockchains. They provide a single point of entry for traders to view all available markets, order books and prices across various blockchains. And since these are built on complex algorithms, they can also optimize slippage, swap fees and token prices to benefit their users.
For example, just as how Google gives you a compiled list of options when you want to buy something on the internet so you choose the best out of them all rather than searching each, sorting and deciding on it, a DEX aggregator works similarly to give you the best value possible for a swap, as rather than traders having to check manually across each DEX, which can be time-consuming and ineffective.
The main task of the liquidity aggregator is — to find the best price that any other DEX can offer in the shortest span. It also aims to protect users from price impact and reduces the probability of failed transactions.
Since manually checking isn’t a viable option, this is where DEX aggregation has emerged as a successful business model witnessing exponential growth in recent times.
Types of DEX aggregators
There are generally two types of DEX aggregation — trading aggregation and information aggregation.
- Trading aggregation: The main job of these aggregators is to aggregate trades. These provide users with various options, so that they can choose the best route to make the most profitable trade.
- Information aggregation: While you trade, the one thing you would want is — access to better information to make better decisions. Most traders rely on real-time data analysis to anticipate market movements, hence information aggregators are vital.
Why are DEX aggregators on demand?
The most common issue people face while using the Ethereum network is — the high gas fees which have negatively impacted the DeFi protocols, pushing users to pay a high amount to trade or swap tokens. In such a case, DEX aggregators can help in providing the best swap or trade rates which can reduce gas costs to a great extent. This is the foremost reason for which these aggregators are gaining wide acceptance.
The liquidity aggregators can also react faster to the regulations by removing DEXs that are not compliant while introducing innovative financial services from the compliant ones. They can ensure greater flexibility where users can leverage the best out of the market.
Most DEX aggregators are the major beneficiaries of DeFi innovations. They can integrate with any decentralized exchanges keeping them up with DeFi’s limitless potential with low fees. Also, providing the user an all-in-one experience seamlessly.
Let’s understand more on how these aggregators can change the DeFi ecosystem.
DeFi and DEX aggregators
With DeFi continuously booming over the past two years, DEX aggregators have become vital for consumers as most people are starting to prioritize decent trade deals. These aggregators have made users’ lives easy by allowing them to operate on all covered platforms without the need to create a separate account or wallet.
The liquidity aggregators can also resolve the problems such as — liquidity and transparency in pricing by becoming a bridge between centralized and decentralized exchanges.
Using a DeFi aggregator at hand, the investors and traders don’t need to search through various DEXs to find the best Yield Farming terms. Through an aggregator’s website, they can get a list of best deals across multiple DEXs.
What are the advantages of DEX aggregators?
DEX aggregators are the latest types of blockchain-based services which are rapidly making their place in the DeFi ecosystem. With DeFi gaining in popularity, investors and traders have started to adopt aggregators because of its advantages to make informed decisions about their trades and coin swaps. Here are some of the prominent benefits of these aggregators attracting people:
- Provides Liquidity:
A DEX aggregator offers a large pool of liquidity to traders wanting to trade vast amounts of digital tokens. Aggregators function as a — collective of exchanges to do business which has to do with the transfer of one crypto to another.
For example, say you want to convert your ETH tokens into USDT on a specific DEX, but you cannot do it due to a lack of liquidity on the platform. Using a DEX aggregator you can liquidate and exit your position without incurring excessive slippage.
- Saves Time and Effort:
One of the potential challenges most crypto investors or traders face is the upsurge of various tokens linked to diverse platforms. There are thousands of tokens in the market, and market participants must work hard to evaluate and design a sophisticated crypto strategy to get the best out of them.
DEX aggregators make this task easier by consolidating the research that a trader has to do in either real-time or otherwise. This saves a lot of time and effort for the user.
- Better Pricing:
When compared to one individual DEX, a DEX aggregator can provide better execution price as they are designed to help traders to liquidate at the highest rates.
Since DEX aggregators are an innovation added to DEXs, users just need to provide minimal information about themselves, in contrast to centralized exchanges which require you to complete the full KYC documentation process before signing in.
For example, unlike traditional exchanges, KyberSwap does not hold any funds or collect any sensitive information of its users. Instead, it allows them to trade assets from within their own wallets.
As DEXs, DEX aggregators can also give you control over your funds, unlike centralized exchanges. They allow you to trade from and to your crypto wallet directly.
- Robust Infrastructure:
DEX aggregators are like the ‘open-source’ platforms to make things much more transparent. They do not have a single source system but a community-based system which improves cybersecurity by being built on a blockchain.
With these long lists of advantages, these aggregators are gaining momentum and bringing millions of funding to several leading projects across the crypto spectrum.
DEX aggregators are a result of the innovation and development around the DEX. In a volatile industry where every second counts, — these liquidity aggregators are a resource for many traders and investors looking to save time. They are helping a wide range of users who always thrive on having a finger on the pulse of the rapidly emerging crypto industry.
In the DeFi world where thousands of tokens are deployed across multiple chains — traders ideally want to be able to trade these assets across chains. This can open new opportunities for DEX aggregators who provide frictionless cross-chain token swaps.
To conclude, DEX aggregators are expanding the use of cryptocurrency exchanges. DEXs are also keen to integrate with the aggregators as it helps to expand their user base. Even though competition around this sector is heating up, investors are definitely going to reap great benefits out of this innovation by saving money.
However, as a trader or investor, do not forget to DYOR — Do Your Own Research — before choosing your DEX or an aggregator to attain best risk-adjusted results. So, do not skip it!
If you are keen to know more about decentralized finance and topics around it, check out Kyber Academy for more how-tos, tips and guides!