Author: https://twitter.com/guiribabrb
Original Article: https://odysee.com/@ShapeShiftDAObr:a/dexes:0

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# Modernization and decentralization come to exchanges

The DEXes – Decentralized Exchanges – have been struggling hard to attract maximum liquidity, aiming to increase profits for themselves and their liquidity providers. This dispute has attracted billions of dollars from those interested in enjoy this market, not only because of the practicality of exchange assets, but also of the profit potential in helping them to remain operational.


However, to better understand how DEX works and why of the fast growth in volume, it’s necessary to contextualize the story behind the exchanges.

The use of centralized exchanges is only necessary to interface between fiat currency and the crypto world. However, for many years, this was the only reality for those who ventured in search of crypto trading platforms. These, at the time, were the main *hubs* for acquiring not only bitcoin, but numerous existing altcoins. However, due to the centralization and the absence of mechanisms to protect users, they were recurrently harmed, either by difficulty in accessing their funds, or by their loss, caused by hacks and *rug pulls¹*.

Thereby, the bitcoiner tonic “*not your key, not your coins”²* began to take shape, not only for the storage, but also for trading cryptoassets.

Slowly, decentralized solutions began to pop up, allowing the purchase and sale of cryptoassets without the need to transfer custody to an intermediate. At first, there were platforms that didn’t hold them, but provided users with an environment to buy and sell [peer to peer](https://pt.wikipedia.org/wiki/Peer-to-peer) **crypto such as LocalBitcoins and Bisq. Thus, the users carried out *off-chain* trades, but used exchanges to effectively exchange assets. These were named [Hash Time Locked Contracts](https://medium.com/wtf-dao/a-brief-history-of-decentralized-exchange-e888fb590af8) or HTLC.

After the development of HTLCs, other exchanges models began to appear, such as *Ring Exchanges*, which developed a *smart contract* that held user assets in custody and, when it received an interaction to exchange assets, performed it. However, even with the innovation, there was still the need to delegate assets to a third party and he was subject to relying on this intermediary.

With the development of the sector, *smart contracts* capable of carrying out atomic token exchanges began to be drawn up, that is, they don’t depend on an intermediary for their execution. Thus, trades previously carried out *peer-to-peer* were transformed into *peer-to-pool*, originating from the decentralized exchanges.

*Peer-to-pool* *is the possibility to trade assets not with a person, but with a pool of assets, that is, directly with a smart contract. This means that by depositing ETH into a ETH/USDC pool, you make it possible to switch between ETH and USDC and vice-versa. However, to be carried out, there is no interaction between liquidity providers and traders, but the communication of both with the smart contract present in DEX.*

So, for DEX to attend the demand for user tokens, they need more and more money in their *pools.* To achieve this goal, exchanges offer incentives to those interested in depositing their cryptoassets and delegating custody of these to the protocol. Lots of maximalist bitcoiners do not agree with the idea of returning their assets to a third party, but it's a fact that many protocols have high figures deposited in their *pools* thanks to the incentives to the *stakers.*

*For information purposes, Curve, DEX specializing in stablecoins, BTC and ETH, holds 21 [billion dollars in custody.](https://www.tokenterminal.com/terminal/markets/defi)*

Despite the incentives provided by the decentralized exchanges, you should think about several factors before depositing your tokens into *DEX pools.*

- Know the assets that make up the *pool* and their incentives*.* Very volatile assets will subject you to Impermanent Loss, but will give you good rewards. Stable assets will make you run away from IL, but they won’t make you rich. Choose the strategy that suits you.
- Analyze the DEX documentation for the existence of audits on *smart contracts*. Audits don’t prevent hacks, but the support companies specializing in analyzing DeFi protocols code brings more security to custody of assets in the *pools*.
- Search for DEXes really decentralized, such as Uniswap, Curve and Dydx. All of them can give profits to liquidity providers and be useful for traders. However, the greater the decentralization of the protocol’s governance, the greater will be the transparency in the decisions made for the present and the future of the exchange. This gives you the ability to understand decisions about future *pool* incentives, votes on new token listings, and even help with protocol maintenance tasks.

Enjoy the opportunities provided by the decentralized exchanges and explore the *pools*, always analyzing the risk x return relationship. Providing DEXes with liquidity can be a profitable activity, but it requires study so as not to incur future losses.

In case of doubts about the topic, read the article on Liquidity Providers. There we cover details that will help you on your journey in the DeFi world.

If the doubts persist, leave a comment or contact us, we’ll be glad to help you!

¹*rug pulls* is a scam applied to users where deposited funds are stolen.

²*not your keys, not your coin* is an expression coined by the Bitcoin community. It means that private keys must not be given to anyone. However, if they are delegated to third parties, the owner of the keys is no longer the owner of their assets, but their custodian.

###### tags: `EN-TheSmith's-Collection`