Decentralized crypto exchanges (DEXs) are blockchain-based apps that facilitate large-scale crypto asset trading among multiple users. Instead of functioning as a financial mediator between buyers and sellers, they do this purely through automated algorithms.
The algorithms that DEXs use are examples of smart contracts which are pieces of code written on top of blockchain networks like Ethereum that trigger various outputs when given certain inputs.
It will be easier to understand explanations to “What Is DEX?” by examining the comparisons between Decentralized Exchanges and Centralised exchanges.
DEX vs. Centralized Exchange
A DEX is commonly used to purchase tokens, not coins. These tokens can only be acquired with blockchain native currencies like Ethereum. To buy cryptocurrencies with cash, most people use centralized exchanges like Coinbase or Gemini.
Decentralized cryptocurrency exchanges (DEX) allow users to conduct peer-to-peer transactions without the involvement of a middleman or a third party. Centralized cryptocurrency exchanges act as a third-party between a buyer and a seller.
Pros and Cons of Decentralized Exchanges
The advantages of a decentralized exchange (DEX) versus centralized exchanges are numerous. However, you should be aware of the limits before utilizing a DEX for all of your bitcoin transactions.
Decentralized exchanges are chosen by certain users due to some of the disadvantages associated with centralized exchanges.
1. Mitigating hacking risk
Decentralized exchange users are not required to transfer their assets to a third party. As a result, there is no possibility of a firm or organization being hacked, and users are protected from theft and hacking.
2. Market manipulation prevention
Decentralized exchanges eliminate market manipulation by enabling for peer-to-peer cryptocurrency exchange. This protects customers against false trading and wash trading.
Customers on decentralized exchanges are not required to fill out know-your-customer (KYC) forms, giving them privacy and anonymity.
Here are a few disadvantages of Decentralized Cryptocurrency Exchanges;
Users of decentralized exchanges must remember their crypto wallet keys and passwords, otherwise their assets will be lost forever and will not be recoverable. Unlike centralized exchanges, which provide a more easy and user-friendly method, they demand the user to learn and get comfortable with the platform and process.
2. No fiat payments
Users who do not already own cryptocurrencies will find decentralized exchanges less convenient since they do not allow them to trade fiat currency for digital ones.
3. Problems with liquidity
Centralized exchanges facilitate 99 percent of crypto transactions, implying that they are responsible for the vast bulk of trade volume. Decentralized exchanges frequently lack liquidity due to a lack of volume, making it difficult to identify buyers and sellers when trading volumes are low.
Exchanges that allow the trade of cryptocurrencies for other assets, such as digital and fiat currencies, are known as cryptocurrency exchanges. Cryptocurrency exchanges, in essence, function as a middleman between buyers and sellers, earning money through commissions and transaction fees.
You may as well checkout these top 10 Decentralised Exchange Platforms.