Understanding Decentralized Exchanges and Their Advantages

People Can Trade Crypto Directly With Each Other On The DEX

The rise of crypto and blockchain has enabled the creation of countless number of decentralized platforms and products. ‘DEX’ has now become a buzzword in the crypto community. But have you ever wondered what exactly it is? 

In the simplest of terms, a decentralized exchange (DEX) is like a digital marketplace where people can directly trade cryptocurrencies with each other. It's like a swap meet for digital money, and you don't need a middleman to hold your money or make the trade happen. Instead, the system uses self-executing agreements written in code called ‘smart contracts’ to enable the trade of crypto assets directly. This enables the individual to take control of their cryptocurrency and allows them to trade it with others securely and directly. 

Advantages of using DEX

Though trading on decentralized exchanges can be expensive, especially if network transaction fees are high when the trades are executed, nonetheless, there are still numerous advantages of using DEX platforms.

• Anonymity: When using a DEX, you don’t have to submit your KYC. This means there is no need for one to give their name, security number, profile pictures, fingerprints, etc, thereby allowing you to preserve your privacy and keep you anonymous. 

• Decentralisation: As explained earlier, in a DEX, instead of a central authority, decision-making and platform governance are handled by the platform’s stakeholders. Using a DEX enables one to participate in its governance by acquiring the platform’s tokens.

• Limitless variety: From the well-known to the weird and random, DEXs offer a virtually endless range of tokens. This is so because anyone can mint an Ethereum-based token and create a liquidity pool for it, so you’ll find a greater array of projects- both vetted and unvetted. 

• Less security risks: DEXs are not controlled by a single entity and do not hold users’ funds in a central location. Thus, this reduces the risk of hacks, thefts, and insider fraud. Only liquidity providers may be at risk, if the platform gets hacked. Additionally, the use of smart contracts reduces the risk of counterparty risk or settlement failures.

• Efficiency: Anyone with a smartphone and an efficient internet connection can trade via a DEX. Being a decentralized exchange system, DEX allows you to transfer tokens in mere seconds. 

Disadvantages of DEX: 

Just like all the systems with numerous advantages, there are always downfalls that come with it. Nothing is perfect. Similarly, DEX also has its disadvantages that should not be ignored.

• Additional network fees: Since DEXs operate on a blockchain network, users may need to pay additional network fees and wait for confirmation times. Additionally, as DEX require users to interact with smart contracts, the system can turn out to be more complex to use than centralised exchanges. 

• Poor user experience: Many a time, some DEXs have been criticized by users for having poor user interfaces and being difficult to navigate. This in turn has made it harder for several users to find the assets they want to trade, place orders and manage their accounts.

• Risk of scams: With a vast array of tokens available on most DEXs including the unvetted ones, there is a high risk of the number of scams and schemes to be wary of. Anyone is capable of listing a new token on a decentralized exchange and providing liquidity by pairing it with other coins. This can leave investors vulnerable to scams such as ‘rug pulls’ that make them believe that they are buying a different token. 

Here are some popular DEXs that you can check out: 

• PancakeSwap: PancakeSwap is a decentralized exchange (DEX) protocol built on the Binance Smart Chain (BSC). This popular DEX eases token exchanges, staking, and yield farming. Also, in exchange for staking tokens in protocol liquidity pools, users receive liquidity pool (LP) tokens that they can farm to earn rewards in the form of the platform’s native CAKE token.

• Uniswap: It first introduced the automated market maker (AMM) model. Uniswap, a protocol for exchanging ERC-20 tokens on Ethereum, eliminates trusted intermediaries and unnecessary forms of rent extraction, allowing for fast, efficient trading. 

• SushiSwap: SushiSwap is an automated market maker (AMM) DEX, which uses a liquidity pool to facilitate trades. It was created as a fork of the popular Uniswap DEX and has its native token, SUSHI, which is used to govern the protocol and incentivize liquidity providers.

Conclusion:

Though many a time, some DEXs have been criticized for reasons such as poor user interfaces, or huge risks for scams, nonetheless, one cannot overlook its efficiency, which has made it quite popular in the crypto community. 

Also Read: Understanding Crypto Tax Loss Harvesting Essentials