If you’re a true crypto enthusiast, you’ll be all-in for decentralization, privacy and financial sovereignty which are what decentralized exchanges (DEXs) hope to protect and preserve.
You’re actually doing yourself a serious disfavor, risking too much, and missing out on a lot of action – and potential profit – if you’re not already trading on DEXs.
In this article, I’m going to reveal everything there’s to know about decentralized exchanges and why they should matter to you going forward.
What are Decentralized Exchanges?
A decentralized exchange is a non-custodial cryptocurrency exchange that enables individuals to trade directly and securely with one another without a central coordinating authority.
One of the major advantages of decentralized exchanges is that they do not maintain custody of your funds, and thus the possibility of being scammed or losing your money due to exchange hacks, market manipulations, server downtimes, and other associated problems with centralized exchanges, is near zero.
In this article I’m going to show you how to trade your cryptocurrencies easily and securely without them ever leaving your wallet.
An exchange is considered fully decentralized only when all of the following four (4) core functionalities are NOT centralized:
- Capital deposits
- Order books
- Order matching, and
- Asset exchange.
However, it’s very difficult for the average crypto investor and trader to verify how decentralized a particular DEX really is, as many decentralized exchanges do not have fully decentralized core functionalities.
How Does Decentralized Exchanges Work?
With decentralized exchanges, you’re in full control of your crypto assets at all times and trading on some DEXs can actually be simpler than you will imagine.
All you have to do is:
- Connect your wallet to the exchange or create a new wallet via the exchange platform and securely back up your private key.
- Fund your wallet with the crypto asset you want to trade and start trading.
- You submit a buy or sell order on the exchange which goes into the order book
- If your order matches with that of another trader –both orders are sent to a smart contract and executed accordingly.
- The crypto assets are then transferred to the respective users’ wallets.
The whole process, from order matching, to order execution, and transfer of assets are handled by the smart contract automatically.
Thus it is nearly impossible for DEXs to be hacked or be subject to regulatory scrutiny.
Decentralized exchanges are no respecter of countries as anyone in any country can post an order to a DEX and trade freely with other people regardless what country they reside.
Types of Decentralized Exchanges
Basically, there are 2 types decentralized exchange:
Currency-centric decentralized exchanges are built on top of a single blockchain – such as Ethereum – and supports the trading of that particular cryptocurrency – such as $ETH, and other Ethereum based ERC-20 tokens.
A currency-centric exchange built on the TRON blockchain will trade only TRX and TRX-20 tokens. The same goes for exchanges built on the other smart contract blockchains such as Waves, EOS etc.
Good exampls of Curreny-centric decentralized exchanges are IDEX, Uniswap etc.
Currency-neutral decentralized exchanges are the newer approach, and are designed to connect with different native cryptocurrencies of other blockchains.
In a currency-neutral decentralized exchange, orders are broadcasted and matched directly on the blockchain through a smart contract which acts as trustless escrow and assets are exchanged via “atomic swap” after a successful trade.
Good examples of DEXs in this category are Bisq, altcoin.io, and flyp.me.
What are the Advantages of Decentralized Exchanges?
- Non-custodial and trustless. Decentralized Exchanges do not require you to trust them with the security of your funds. You don’t even need them to be sincere or genuine –the founders can be scammers, employees can go rogue, hackers can take over the exchange for all you care, without you losing your funds because your coins are in your wallet and resides directly on the blockchain –not the exchange.
- Unlike centralized exchanges, DEXs do not require your personal information –not even your email address is required before you can trade on decentralized exchanges.
- Decentralized Hosting: Server downtime is highly unlikely with decentralized exchanges because their hosting is distributed among participating nodes in a decentralized computing network.
- Lower Fee: Fees on decentralized exchanges such as Binance Dex. Is extremely low and executed orders are even free. You are charged a very low fee only for canceled or expired orders on Binance Dex. However I understand that the fees on some other DEXs can be very unreasonable.
- More Secure: Because your funds never leave your wallet, no matter what happens with the exchange, you’re safe. As long as you keep your wallet free from hackers and third parties access, you should have nothing to worry about.
- No Limitations: On centralized exchanges, there’re limits to how much you can transact or withdraw within a certain time limit and based on the level of KYC you’ve passed. That’s not the case with DEXs. You can trade as much as you want within any timeframe as long as you have the funds in your wallet.
- Uncensorable: On centralized exchanges, your account can be suspended, frozen or funds practically taken from you by the exchange for many reasons. That’s not possible on decentralized exchanges, even if you’re trading with stolen bitcoin or any other crypto for that matter.
What are the Disadvantages of Decentralized Exchanges?
- You are fully responsible for your own security. Decentralized exchanges cannot help you if a third party gains access to your wallet or trading account. You key, your fund, your security, your responsibility.
- Lower Liquidity. Liquidity on Decentralized is extremely low compared to centralized exchanges. However, things are changing as many more people discover that DEXs is actually the most ideal place and way to trade cryptocurrencies.
- Limited functionality. Unlike centralized exchanges with their advanced trading tools, DEXs have limited features and functionalities. Features such as stop-losses, take-profit, margin trading, lending etc. are not available on Decentralized Exchanges yet.
- Difficult for non-technical users. DEXs are a little too technical, compared to their centralized counterparts. However, some DEXs such as Binance Decentralized Exchange have made it way very simpler for beginners to find it easy to trade, so this issue should be a thing of the past as the market evolves.
List of Decentralized Exchanges:
According to DefiPrime below is the list of the most promising decentralized exchanges currently available in the market. No. 1 is my personal favorite.
- Binance DEX
- Bamboo relay
- Loopring Exchange
- Totle Swap
- Uniswap Exchange
Trading on centralized exchanges goes directly against the true spirit of cryptocurrency, which was created to minimize and possibly, eliminate the reliance on third parties (banks) are traded on centralized exchanges.
What’s even more amazing is how they would like to guilt you into thinking that you are paranoid if you want privacy “too much”, when in reality they are suffocating you with undue scrutiny and control over every area of your life – especially your money.
In order to realize the full potential of cryptocurrency and the blockchain technology we must rely first on decentralized platforms and avoid decentralized infrastructures as much a possible even as decentralized technologies are still developing and evolving to be what they should be.
What decentralized exchanges do you use to trade your crypto assets and what do you think about decentralized exchanges generaly? Share with us in the comments section blow.
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