Even though exchange sites allow for fast and seamless transactions, a glaring problem that other investors can’t shake off is that they are centralized. This is where DEX or decentralized exchanges come in.
Decentralized exchanges were invented to provide solutions to this problem by featuring a non-custodial framework that allowed users to transact through peer-to-peer networks and more.
When a platform is centralized, it means that transactions are handled by a third party, which can increase fees and processing time. Additionally, these kinds of platforms are also susceptible to misuse of information when the main server is compromised. How do decentralized exchanges remedy this? Keep on reading to find out.
What are decentralized exchanges?
Decentralized exchanges or DEX for short, are exchanges that have no middlemen. This means that every account and all transactions made within these exchanges won’t be managed by any form of central authority. Instead, they use smart contracts to facilitate each request by users.
What are smart contracts?
Smart contracts are formal agreements written in code between two parties, usually the contract creator and the receiver.
Once both parties agree with the set conditions from both sides, the contract will self-execute. The reason why it can’t be reversed is that smart contracts are executed on blockchain technology which means that once it’s recorded they can’t be tampered with.
How do decentralized exchanges differ from normal exchange sites?
Decentralized exchanges offer the same convenience that centralized exchanges offer but their approach is a little different. Aside from eliminating the middlemen for a much cheaper exchange fee, DEXs leaves their users fully responsible for almost everything including their private keys and wallets.
Moreover, this non-custodial framework makes it possible for direct interaction and communication between two parties without any form of interruption from a central authority.
Different types of decentralized exchanges
Different types of decentralized exchanges exist today and each of them has its unique feature. If you’re thinking about making the switch to decentralized exchanges, here are your options:
Order Book DEXs
Order Book DEX is the more traditional type because the earliest iterations of this kind of exchange used order books which is something that you’ll also see with its centralized counterparts.
What this book mainly does is monitor and record the data of all the buy and sell orders placed in a specific asset in the network. This means that pieces of information such as open orders are held on chain but the funds of the users will remain only in their wallets.
From the name itself, these types of decentralized exchanges aggregate liquidity from other DEXs. This is to keep the prices of the order intact as much as possible until the order does execute in other words, to avoid slippage.
But to summarize the main goal of Dex Aggregators, their mission is to give traders the best price available to them for their orders during that time in only a short period. Moreover, they also aim to offer traders the best swap fees in the market.
Examples of decentralized exchanges
Investors that had enough of the problems that centralized exchanges propose have started making their way to DEXs. Even though there are several options in the market today, some became more famous than others, whether it be because of ease of access or just personal preferences.
Here are some of the most commonly used Decentralized exchanges available today:
Uniswap is a DEX based on the Ethereum blockchain. It’s one of the most successful platforms to make use of the Automated Market makers system or AMM which incorporates liquidity pools to either minimize or maximize liquid.
Pancakeswap is one of the most famous DEXs in the market today and it’s evident when checking their trading volume. This is thanks to its variety of features which includes letting traders partake in liquidity pools, farm and trade tokens.
Advantages of using decentralized exchanges
Aside from being a great way to buy, trade and sell assets seamlessly, decentralized exchanges also offer various benefits that help them stand out from others. Here are some of them:
Centralized exchanges are already considered by some as private but DEXs take anonymity to the next level by removing the need for KYC protocols. KYC or know-your-customer is a protocol used by various financial institutions to verify a user’s identity.
Although KYC is useful as it helps prevent crimes such as fraud from happening, this brings up a great problem if a security breach happens. This is because all the information that the users have shared with the platform will be traceable back to them which can be used to commit cybercrimes.
Most investors are worried about hacking, especially when they’re trading assets online. With decentralized exchanges, this risk is mitigated because users won’t have to transfer through a third party which are prone to hacking and theft.
There have been several security breaches and the most notorious ones had centralized exchanges as victims such as Altsbit, Upbit and VinDAX.
Full control over your assets
Because decentralized exchanges eliminate a central authority figure, this leaves investors with full control over their assets. This means that you can rest easy knowing that your account is only in your hands and that it can’t be frozen or stolen.
Protection from market manipulation
Decentralized exchanges run on peer-to-peer networks meaning that all transactions only involve the sender and the receiver. This makes it possible for users to protect themselves from market manipulation which is an act of abuse where people deliberately interfere with the market to artificially inflate or deflate it.
Are decentralized exchanges for you?
If you’re looking for a hassle-free and peer-to-peer transaction, decentralized exchanges are worth looking at. Moreover, you’ll also be getting a solid exchange platform that features cheaper transaction fees.
Whether you’re from the country or not, these exchanges provide next-level security and privacy. Most of all, they still act the same if not, better than your usual centralized exchanges.