On the Hunt for the Best Rate: DEX Aggregators vs Instant Exchanges

When exchanging one asset for another in an unconventional combination, crypto users no longer have to hunt for a better deal themselves since the ecosystem offers plenty of products that promise to do exactly that. Swap routing is the core feature of two completely different types of platforms: instant crypto exchanges and DEX aggregators. Both promise to mix and match their sources of liquidity to provide you with the best rate currently available on the market. But how does this work in either case? And is one strictly better than the other? Let’s review and answer.

What are DEX Aggregators and How They Work

Decentralized exchanges, or DEXs, hardly need any introduction by now: these smart-contract-powered products connect users swapping one token for another with the help of mechanisms like automated market makers (AMM). Uniswap and Pancakeswap are some of the most well-known examples.

However, what do you do if the crypto pair you need is not on any single platform? Sure, you can make multiple transactions but the associated fees will add up. On top of that, since you are already going to use multiple liquidity sources, you’d want to find the optimal rate. DEX aggregators are a solution in this exact scenario.

An example of such a protocol is 1inch. The way it works is it scans multiple integrated DEXs simultaneously to calculate optimal trading routes; it is more economical than performing transactions manually because aggregators split orders across protocols to minimize slippage and maximize output.

As such, 1inch and the like have no liquidity sources of their own but are more akin to rate search engines. The liquidity comes from DEX(s) that the aggregator connects a user to: Uniswap, Curve, etc. They can route swaps cross-chain as well, making them even more valuable as a service.

Slippage is another reason why you might want to avail of such a service. On a regular DEX, when the liquidity is low, a large order can impact prices unfavorably, forcing users to think about order splitting. An aggregator can perform this automatically, while searching for the most favorable rate at the same time. For example: attempting to swap $10 thousand USDC to ETH in one batch is more likely to move the price and result in a worse rate than expected; an aggregator can propose to route it in a 60/30/10 ratio through three different DEXs while wrapping it into a single click of a button.

What are Instant Exchanges and How They Work

On the other side of the scales are instant exchanges; if DEX aggregators connect to decentralized exchanges, these platforms deal with their centralized counterparts. Examples include SimpleSwap, Changelly, and the ChangeHero crypto exchange.

If 1inch or its competitor routes a transaction through integrated DEXs, an instant exchange calculates the rates based on what is available in their own liquidity sources, most commonly, CEXs (although connecting to a DEX is not out of the ordinary).

Similarly to a DEX aggregator, a user of an instant swap platform can choose just about any combination of the supported assets rather than a certain market pair. Instead of connecting their wallet to the service, users send an amount they specified to an address the platform generates for them. In return, once an incoming transaction is confirmed, the service sends the requested currency in the appropriate amount. This design hinges on trust assumptions but circumvents the need to onboard to the exchange(s) where the trade(s) takes place.

Security Implications of (De)Centralization

The main distinction between the two is not in the liquidity sources, though, but in how much of the process is on the chain.

If the cross-chain swap with a DEX aggregator uses bridges to move tokens from one network to another, for an instant exchange, this process is off-chain. As a result, it is not as transparent and partially centralized.

However, the instant cryptocurrency exchange design is non-custodial, meaning that these platforms do not track user balances or have custody (i.e. access to private keys) over user funds at any point of the swap. It’s because these platforms emerged as a direct response to users seeking solutions that would not require deposits like most CEXs do.

Furthermore, to use a DEX aggregator, you need to connect your wallet. While safe most of the time, this action can still expose users to several risks: permission risks for spending your tokens, smart contract vulnerabilities, and malicious transaction signing. Even though from the user experience standpoint, connecting a wallet once is more convenient than sending funds for exchanging on an instant swap service every time, the wallet is not exposed to any such risk there.

Choose Your User Experience: Simple or Controlled

Needless to say, the user experience varies between these two types of platforms. Wallet connection is one aspect we mentioned but it’s not the only difference.

As simple and controlled DEX aggregators aim to be, they still require the user to be familiar with more advanced wallet features like permissions and gas fee management. As such, the entry threshold is low but not absolute-beginner-friendly.

Instant crypto exchanges may also be tough to navigate as someone who has no idea of how to use crypto at all but they generally are considerably more simplified. The interfaces use simple labels (i.e. ‘You send’ and ‘You get’) and commands and do not dwell on blockchain-specific concepts more than necessary. It’s less customizable but less confusing, too. And in case some confusion does arise, these platforms offer support service instead of leaving the user to troubleshoot themselves.

It warrants mentioning that the lack of need for a user account does not entirely remove customer identification requirements in the case of instant exchanges. If you try to swap a large amount on one of those, expect the transaction to be paused until you go through a “know-your-customer” procedure. Decentralized services such as exchanges and aggregators do not enforce similar policies and operate on permissionless basis, making them a more privacy-conscious choice but closing off fiat pathways entirely.

Conclusion: Which Should You Choose?

Long story short, after unpacking the two types of rate routing platforms, the choice becomes obvious. DEX aggregators cater to a demographic that values optimization, privacy and transparency over accessibility features such as customer support. Instant exchanges can tap into deeper liquidity sources and offer more coins and tokens on more networks but have their own limitations. The crypto industry benefits from having both to meet varying user demands.

This article was prepared by Catherine Welsch. As the lead writer in the ChangeHero team, she educates the user base about all things blockchain and crypto.

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