What is a Decentralized Exchange (DEX)? – Flipster Blog
If you have been in the crypto space for quite some time, you would definitely have heard of the term “DEX” before. DEX, also known as Decentralized Exchange, refers to peer-to-peer marketplaces in which cryptocurrency investors conduct transactions without entrusting their funds to an administrator or custodian. These transactions are enabled via the use of smart contracts, which are self-executing agreements represented by code.
The definition might come off as a little confusing for beginners and amateurs who are new to cryptocurrency, but this article is all you need if you are interested to learn more about decentralized exchange. Read on to find out more!
More on Decentralized Exchanges
With decentralized exchanges, users can trade straight from their wallets by engaging with the smart contracts that enable the trading platform. Traders are accountable for their funds and are liable for their loss if they commit mistakes like as losing their private keys or transferring funds to incorrect addresses.
Popular decentralized exchanges are built upon major blockchains that allow smart contracts and DEX transactions are handled on the blockchain instantaneously. DEXs are typically created with open-source code, allowing anybody with an interest to understand precisely how they function. That also implies that developers may reuse pre-existing code to establish new competing projects. Some examples of such projects include Curve, Sushiswap and Pancakeswap.
Benefits of Decentralized Exchanges
There are several potential benefits and advantages when it comes to the utilization of decentralized exchanges. Some of them include:
1. Security
Since all funds in a DEX trade are housed in the traders’ personal wallets, they are potentially less vulnerable to a breach. Users on such platforms can readily trade from “cold” or “hot” wallets without using their private keys or recovery keys. In essence, users are liable for the security of their own accounts. Furthermore, stealing cash from specific users is typically not profitable for hackers because it is both expensive and complex.
2. Accessibility
Decentralized exchanges’ peer-to-peer lending, fast transactions, and privacy have made them more attractive in emerging markets where reliable banking facilities may not be accessible. Anyone with a smartphone and internet access may trade on a DEX. Individuals have complete ownership of their assets and can utilize them however they please. This demonstrates the potential for straightforward, user-friendly platforms.
3. Privacy
Decentralized exchanges are not governed by any central body and, as a result, do not require submitting any personal information. Some decentralized exchange platforms may need registration, but users are under no obligation to disclose their private information or personal documents to third-party entities. This also implies that users do not need to fill out know-your-customer (KYC) forms, allowing them to maintain their privacy and anonymity. The client only needs a wallet address to begin trading.
Drawbacks of Decentralized Exchanges
There are several potential drawbacks and disadvantages when it comes to the utilization of decentralized exchanges too. Some of them include:
1. Complexity
Users of decentralized exchanges must remember their crypto wallet keys and passwords, otherwise, their funds will be lost permanently and cannot be retrieved. In contrast to centralized exchanges, which provide a relatively easy and user-friendly procedure, they require the user to understand and become acquainted with the platform and the process. This is also why the procedure of depositing funds for trading on a DEX is substantially more complicated.
2. Scalability
The volume of transactions a network can handle before hitting capacity determines blockchain scalability. The Bitcoin network, for example, performs 4.6 transactions every second, whereas Ethereum achieves 15 transactions every second. Decentralized exchanges are powered by smart contracts that run on blockchain networks. As a result, DEXs are constrained by the restrictions of their fundamental network infrastructure.
3. Liquidity Risks
Decentralized exchanges are prone to liquidity problems. All financial assets traded on a given exchange must have enough liquidity. However, owing to the knowledge deficit of non-expert users, the requirement for liquidity remains a significant worry for many decentralized exchanges. Furthermore, the average trade volume on DEXs also contributes to liquidity problems on decentralized exchanges. When compared to centralized exchanges, average trading volume remains a modest portion of the total trading volume in the crypto market.
Should I Choose DEX?
After all, the utilization of a decentralized exchange is undeniably a double-edged sword. A decentralized exchange has its benefits, but at the same time, it can have certain disadvantages as well. Since the concept of decentralized exchanges is still relatively new, it is of no surprise that investors and traders are still leaning more towards centralized exchanges.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.