Benefits of Decentralized Exchange?
In today’s article we want to explain what a decentralized exchange is, better known as a DEX in the crypto world. These exchange markets are highly appreciated by fans of the crypto space since they operate in a decentralized manner, that is, decentralized app developer there is no central entity that governs the platform, but the users themselves are in charge of its government.
What is a decentralized exchange (DEX)?
In the crypto area, a DEX is a type of cryptocurrency exchange that allows users to buy and sell these assets through direct peer-to-peer transactions. It works in a decentralized way, that is, without depending on a central authority.
A DEX shares some similarities with a centralized exchange (CEX) in that it allows users to trade crypto assets with other assets, be it fiat money or another cryptocurrency. An important difference between the two types of exchanges is that, in the case of a DEX, the transfer of assets and their security are supervised operations based on a distributed ledger or blockchain. In addition, investors do not give up custody of the funds, so they maintain control over them at any time.
How does a DEX work?
A DEX operates without an intermediary to complete transactions and orders are executed on-chain. To facilitate trading, everything is based on Smart Contracts. A DEX uses various DeFi protocols and mechanisms, such as order books, liquidity pools , AMMs , and aggregation tools.
Based on this, different types and generations of DEX can be classified, including:
- DEX based on order books like dYdX and Binance DEX.
- DEXes like Uniswap , Curve, SushiSwap , Balancer, Bancor, and Kyber.
Some of its components have different degrees of decentralization, which has even led to the rise of semi-decentralized exchanges.
Advantages of decentralized exchanges
DEXs have several advantages, including:
- They do not hold user funds, so there is no counterparty risk.
- Compliances against money laundering or Know Your Customer are not the norm. Therefore, it is not necessary to confirm the identity of the users, and the only necessary element is a crypto wallet.
- Because essential operations take place on the blockchain, the technology used eliminates single points of failure.
- Because users do not have to transfer their assets to an exchange, the risk of theft or loss of funds caused by hacking is low.
- Investors have access to a greater variety of tokens.
Disadvantages of decentralized exchanges
Despite the many advantages, DEXs are not without their drawbacks. Some of these are:
- Low trading volume and low level of liquidity.
- No chance of recovery if private keys are lost: Because users have these private keys and there is no Know Your Customer process or any way to get back into a transaction, blockchain Dapp development company if they are lost or stolen, the DEX you can’t get them back .
- Higher commercial rates.
- Network congestion when there is a high volume of transactions.
- They are usually not as user-friendly compared to centralized exchanges and have limited trading functionality.
- In the case of DEXs, the Price Slippage phenomenon is common.
conclusions
To sum it up, even though many decentralized exchanges have sprung up in the past few years, there is still room for improvement. Furthermore, centralized exchanges remain, at the moment, the preferred option of many cryptocurrency investors.
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