May 01, 2021

When Should You Use DEX Aggregators?

Decentralized crypto exchange aggregators are on the rise. They integrate decentralized exchanges aiming to offer you the best deal. But are theyalways the most optimal solution?

Decentralized exchanges (DEXs) are the embodiment of the crypto spirit - trade anything you want with all liquidity coming from users like you. It is a market segment which exploded in the summer of 2020, growing strongly ever since. Even though the market has two clear market leaders - Uniswap on the Ethereum network and Pancakeswap on Binance Smart Chain - it has become increasingly diversified with new exchanges appearing almost every day.

Along with the diversification came DEX aggregators. Their aim is to simplify the DEX universe and give users the best deals without the necessity to scour multiple websites. In fact due to dynamically changing prices you cannot really compare DEX offers yourself, as it would be comparing apples with oranges due to dynamic pricing.

There are two DEX types:

1️⃣ Pure aggregators

The best example is the trading interface in the ubiquitous Metamask wallet. When you press „Swap“ in the Metamask interface, submit the crypto you want to swap and the volume, Metamask compares offers from various DEXs and shows you the one best deal.

Screen from Metamask swap

2️⃣ Routing aggregators

These solutions are more technologically advanced and aim to choose the best route for your transaction via any of the other exchanges or liquidity protocols. The goal is to reduce the total transaction cost for the user. The most well known example is 1Inch. Its interface is similar to Uniswap, but the aggregator strives to find the best route for your funds over multiple exchanges.

1inch crypto exchange screenshot

So what are the use cases for aggregators? The typical ones are when you execute a large order, trade unpopular tokens or both. When trading on a DEX, you interact with a liquidity pool created by the its users. Your trade impacts the pool composition, as you remove the tokens you buy and add the ones you sell. The token price is determined by the composition of the pool. The bigger your trade is compared to the pool, the more you will impact its composition and the price you pay. Such price impact always means you lose money.

Liquidity pools are bigger for more popular tokens. However large orders or trading unpopular tokens might impact liquidity enough to cause a loss, also called price slippage. This is where an aggregator with access to other liquidity sources can help you avoid the loss.

However the aggregators are not free. Metamask charges a <1% fee and on 1inch if you encounter positive slippage during the trade, meaning the price has changed in your favor, it will be taken by 1inch. While the price impact might be negligible, routing aggregators also make your trade more complex which is no trivial matter.

Trading crypto on DEXs can involve a few subtransactions in itself, especially for less popular tokens. Doing the same on an aggregator may involve multiple subtransactions over multiple exchanges, making the whole operation more complicated. It is already evident at the start of the trade. E.g. on 1inch you need to choose if you want to optimize for the return you get or gas cost, as optimizing for both would be too complex. For some trades toggling this option might make a material difference in terms of results. Usually for simple swaps DEX gas fees are lower than those offered by aggregators. They are also better approximated.

Furthermore the aggregator trade complexity means the offer quality you get depends on the veracity of the platform‘s algorithms. The deals you get may sometimes be burdened by extremely high slippage. The platforms will usually warn you when presenting such an unprofitable option, so take care not to click any pop-ups away without reading them first. There have also been rare cases of algorithms allegedly malfunctioning, which at the very least creates unnecessary subsequent hassle and at most a loss of funds.

So when should you pass on a DEX in favor of an aggregator? First of all if you are trading a few hundred dollars, a DEX should be completely fine. Also if your transaction is doable with the default 0,5% slippage setting on Uniswap or Panacakeswap, there‘s no need to use an aggregator. For bigger transactions check the slippage a DEX gives you. If the slippage % multiplied by your transaction volume is more than a hundred dollars, you might want to give an aggregator a look. An aggregator will often have higher gas cost than a DEX so if the difference in offers does not approach fifty dollars, the DEX will be the safer option. And whenever using an aggregator or a DEX, take care to read any pop-ups and warnings you might get. Also check out our two important tips beforehand to ensure you do not put your funds at unnecessary risk.