When you want to buy a new laptop, you often look at which store you can buy that laptop at the cheapest price. You can use all kinds of comparison sites. Each DEX asks a different price for a certain trading pair. Because there are so many different DEXs, it is not easy to find the cheapest platform for a certain trading pair. By means of a DEX aggregator it's possible to get an immediate insight in the different prices which the DEX's ask for the trading pairs which they offer. This way you can quickly see which platform has the cheapest trading pair.
What is a DEX?
If you want to buy crypto then you can buy it on a trading platform. A centralized trading platform is centrally controlled and run by a company. Such platforms use an order book where for each buyer a seller must be found to complete a transaction.
Now suppose you want to buy 1 bitcoin on Bitvavo. An order is then placed in their order book. Bitvavo ensures that the seller is matched with the buyer allowing both orders to be executed.
A DEX works very differently. It runs on a blockchain and is not controlled by a central party. Therefore, there is no order book. Buyers and sellers are not linked. Instead, tokens are exchanged (swapped) against each other in a liquidity pool. There is no company to run and manage the platform. The users ensure that there is enough liquidity in the platform.
The liquidity pool is in theory a smart contract in which different tokens are stored. The DEX first determines a price for the trading pair with which a user wants to execute the transaction. This is done through an Automated Market Maker (AMM), which is nothing more than a piece of code. Then, at the price determined by the AMM, tokens are swapped against each other between the user and liquidity pool.
Suppose you want to buy 1 Ethereum coin (ETH) with 100 AAVE tokens. You first specify the trading pair (AAVE-ETH) in the application, after which the AMM of the DEX calculates the price for this trading pair. Then you can agree by swapping the tokens. The DEX will withdraw 1 ETH from the liquidity pool, and then send your 100 AAVE token to the pool. The transaction is now successfully completed.
What is a DEX aggregator?
A DEX aggregator is a protocol that extracts the prices of all trading pairs at different DEXs. These are then displayed in an overview. This gives the user the possibility to see for himself where they can buy a certain trading pair at the lowest cost.
DEX aggregators are not new. Since 2019, these DEX aggregators have been on the rise. One well-known DEX aggregator is 1Inch. 1Inch is one of the best known and most used DEX aggregators for DEX. 1Inch is not the only one. There are also other DEX aggregators that do the same thing as 1Inch.
How does a DEX aggregator work?
The purpose of a DEX aggregator is to show the investor where that investor can purchase a crypto at the lowest cost and price. A DEX aggregator is therefore designed to optimize crypto prices. This allows an investor to make a good consideration in which crypto the investor wants to invest in.
A DEX aggregator can only retrieve the prices of a DEX if the aggregator is installed on that blockchain of the DEX. This also makes sense because the real-time prices are influenced by the liquidity in the DEX. This is not publicly available. So an aggregator cannot display Uniswap prices if that aggregator is not running on the Uniswap blockchain (Ethereum blockchain). The DEX must provide the data to the DEX aggregator running on the same blockchain.
A DEX aggregator can also get the data from somewhere else, from a different source. For example, through a free application. But that will not improve the reliability of the data. Every DEX has an API (application programming interface) that allows an aggregator to get the data from a DEX quite easily.
When an aggregator has read the data from a DEX, it still needs to be displayed properly on the platform of the DEX aggregator. This also needs to be done in a user-friendly way. Not every investor is a blockchain specialist. The better the user-friendliness, the more investors will step in and use this aggregator. If the data is properly read from the DEX aggregator but is not displayed properly on the platform, then investors will still not benefit from the platform.
DEX aggregator problem solver
A DEX is becoming increasingly popular and more and more investors are investing in a DEX. A DEX offers features that central exchanges do not. For example, it is easier to buy an unknown crypto on a DEX. At a centralized DEX, such crypto must first be verified that takes a lot of time. Please note that there is a high risk of buying unknown crypto on a DEX. Anyone can invent and launch a new crypto. A rug pull or pump and dump is lurking. Therefore, it is good to always do your own research on the unknown crypto you want to invest in.
Investors face many problems in finding the best price for a trading pair. Each DEX can use a different Automated Market Maker and liquidity pool. As a result, crypto prices can vary. The price of a crypto may be slightly higher or lower on different DEXs. This is an opportunity for crypto arbitrage.
Thus, through a DEX aggregator, investors can quickly see where they can buy certain crypto at the lowest price and cost. The DEX aggregator retrieves this data from the DEX itself and displays it in a user-friendly way.
How to choose the right DEX aggregator?
As more and more are created, it is good to look at which one is the most reliable. This goes without saying, but is often forgotten by investors. It is also important to find an aggregator that offers support for the crypto you want to trade. You can also look at reviews and experiences that other investors have with a DEX aggregators. Do research before putting money into a DEX aggregator! Especially if it is a new and unknown aggregator that just doesn't exist very long.
Pros
- Crypto investors can see at a glance what the prices and transaction costs for a trading pair are on different DEXs.
- As the popularity in crypto increases, so does the demand for DEX aggregators. The more aggregators the more comparison material for the investor.
- DEX aggregators encourage investors to use DEXs and add liquidity themselves in a DEX. Liquidity will increase as a result.
- The focus of an aggregator is in the usability of the platform. This makes these platforms easy to use without too many technical details.
- You will never again pay too much for a crypto.
Cons
- DEXs and aggregators are complicated concepts to understand for novice investors. Surely you need to understand what a DEX and aggregators are before you start using them (through my blog I hope to contribute to this!)
- Scams still occur, even with DEX aggregators. If a new crypto is introduced, it is not yet possible to find out if this crypto is a scam.
- DEX aggregators have limited functions other than displaying the best prices. The functions will need to be expanded in the future to provide even better support to the investor.
Examples of DEX aggregators
- 1Inch
- Paraswap
- Matcha
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