Understanding decentralized crypto exchanges
Most trading in the crypto world takes place through centralized exchanges. Some of the most popular centralized exchanges are Binance and Coinbase. Such exchanges hold a person's crypto coins and facilitate trading in crypto assets. However, these marketplaces can be vulnerable. In the past few years, a number of high profile centralized exchanges have been hacked and crypto worth billions of dollars - lost.
Centralized exchanges are not the only option for crypto traders. There is another type called decentralized exchange (DEX). A DEX is an exchange that does not use any third-party service to hold the crypto assets of a user. Instead, funds are exchanged directly between the users of the platform. The entire process is automated. Various solutions are adopted to enable trade. For instance, a multi-sig escrow system may be used. Alternative, proxy tokens that represent the actual tokens might be utilized.
The Benefits of a Decentralized Exchange:
The main benefit that a DEX offers customers is security. This is because the exchange does not store any crypto assets on behalf of the users. As a result, hackers are not interested in DEXs since there is no centralized entry point that would allow them to cart away user funds.
Low Risk of Price Manipulation
Price manipulation on a DEX is quite difficult. It is impossible to falsify trade volumes since all the information is recorded on the distributed ledger technology (DLT). There is also no centralized structure, which would be incentivized to manipulate the prices.
Lower Entry Barriers
On a DEX, there is no personal account that needs to be created. Users are also not required to verify their identity, which can be confusing at times. This also ensures that a user does not have to supply personal data, which can be stolen and place them at risk of online fraud.
No Regulatory Control
Regulators have the right to ask for your personal data and even confiscate your crypto holdings at a centralized exchange. However, this is not possible on a DEX. A DEX cannot be blocked or controlled from a central point. For those seeking to avoid overbearing regulatory control, a DEX is a suitable option.
Low Entry Barrier for New Projects
Centralized exchanges today hold almost all the power in the crypto startup industry. If a centralized exchange decides not to list a coin, it can significantly dim the prospects of success for the project. However, DEXs can solve all that. Any crypto project that believes in their vision can list their coins on a DEX and receive the funding that they need.
The Downside of DEXs
While DEXs have many benefits, there are reasons why they are not popular with crypto traders. Here are some of them:
- If you lose access to your account, you cannot regain it due to the lack of a KYC process;
- They have limited trading options, which is not ideal for avid crypto traders;
- They have low liquidity, which can slow down the completion of the buy and sell requests;
- They have limited scalability, which can cause delays and higher commissions;
- There is a lack of customer support.
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