If you have been reading our blogs, it means that the DeFi ecosystem piques your interest, for sure! As you know, there are several ways to make money in this sector, by providing liquidity in a pool for example, which allows you to earn LP tokens and collect transaction fees.
You can also lend your funds in exchange for interest rates or simply trade on a decentralized exchange (DEX) platform. Lots of possibilities! The question is this: Which protocol is best for all this? It is also possible that one platform is more interesting for lending, but not necessarily for trading.
If you’ve ever wondered about this, you’ve come to the right place! Indeed, today we are going to discuss DEX aggregators.
What is a DEX aggregator?
Let’s use an analogy to simplify, shall we? We’ve all been on vacation before, right? It can be difficult to find the best price for a plane ticket, or to choose a hotel with the best rate. We’ve all been there and that’s why we’ve created price comparison sites, which allow you to choose the best price for your hotels and flights.
For DEX exchange platforms, it’s the same thing. There are a lot of offers and it is hard to know what is the best that suits your needs, and that is where the aggregators come in. They act as price comparators and allow you to choose the protocol that best suits your needs and requirements.
How does DEX aggregator work?
DEX aggregators are protocols that will find the optimal route for you to exchange the desired tokens, and compile all the necessary steps into a single transaction, optimized for transaction costs or “gas”. This will sometimes include the use of a specific route on an Automated Market Maker (AMM) or even multiple exchanges on multiple Automated Market Makers (AMMs) in the same transaction.
The interface is identical to that of an Automated Market Makers (AMM) – select token A, select token B, insert the amount of token A to be exchanged and the interface indicates the amount of token B you will receive with the route taken indicated below. The difference being that the route can go through several protocols rather than just one.
This means that using a DEX aggregator rather than a traditional Automated market Maker (AMM) will save you time and money, which will benefit your DeFi trading. Some even allow you to place limit orders, so you can manage your entries and take-profits more efficiently.
Advantages of DEX aggregators
The advantages of using an aggregator are numerous, in particular:
– Best price for Trader
The algorithm will try to offer the best price available among all decentralized trading platforms, thus offering the trader the lowest possible price for his purchase. A bit like the best price on a centralized trading platform.
– Lower price impact on project token
The algorithm will try to optimize the routing so that the sale of a token has the least possible impact on its price. We all know how this can be a central concern of any CEO launching a new project.
– Swap rate, Slippage & Fees optimization
The algorithm will compare all available platforms and choose a “path”, which can be composed of several protocols, for your transaction while minimizing gas fees and expected slippage.
Disadvantage of DEX aggregators
Of course, the use of a DEX aggregator also has some drawbacks:
– Not beginner friendly
As with all DeFi protocols, aggregators are not very beginner friendly and a beginner will find it easier to operate on a centralized exchange platform.
– Scam risk
The risk of scam is higher in the DeFi ecosystem than on classic platforms, so always make sure to do your due diligence before using any DeFi protocol
Which DEX aggregator to choose?
There are several, but here we will recommend our top three picks:
1inch is one of the best known protocols and although the platform does not support the use of fiat, 1inch allows you to swap between 250 currencies at the best price. In addition, there are no additional fees for using 1inch.
Another well-known project that has been around since 2016. It is a liquidity aggregator that works on a large number of blockchains such as: Ethereum, Celo, Optimism, Polygon, Avalanche, Fantom, Binance Smart Chain.
Similar to 1inch, there is no additional fee for using Paraswap, only the underlying DEX fee is due.
In conclusion, some trading platforms like Uniswap already allow you to choose between several liquidity pools in order to optimize your price. For the others, using an aggregator is an excellent idea to optimize your transaction costs, gas fees and to minimize your slippage.
Of course, as with all DeFi protocols, or even centralized ones for that matter, never forget to do your own research. Scams are legion in the crypto world, stay alert!