The Cryptocurrency World Needs Decentralized Exchanges
Dapps stand for decentralized applications. A decentralized application is a smart contract that gets deployed to form an “application” on the blockchain. Since the application lives natively on the blockchain, that’s why it is called a decentralized application. In short, it’s spelled “dapp”.
Now that we know the basics of dapps, let’s talk about decentralized exchanges specifically.
Decentralized exchanges or DEX-es allow users to trade assets without depending on middlemen and other external entities. Instead, trades happen between two parties via smart contracts only after both sides agree on terms.
There’s no central authority involved here, so your data remains secure. You don’t even need to register; you just need to connect your wallet to the DEX via a web3 connection.
There are many advantages to trading on a DEX platform compared to traditional ones. One major reason is speed. You don’t necessarily need to wait before receiving confirmation once you place your order. Everything is automated via the codes in the smart contract itself.
However, some critics argue that most DEX platforms lack liquidity and are too complex for ordinary users to understand. The recent rise of AMM DEX (automated market maker decentralized exchange) solved this problem.
An example of this is Uniswap. With Uniswap and other AMM DEX-es, they give incentives for people to provide liquidity. Nowadays, Uniswap has enough liquidity for most of the popular ERC-20 tokens on Ethereum blockchain.
With Uniswap, it allows anyone to swap Ethereum tokens right inside web browsers without needing to download anything.
In comparison, traditional exchanges require users to download various mobile wallets first. Then, users must sign up for accounts and provide supporting documents like identity cards or utility bills. Some even ask users to submit proof of residence and citizenship status.
These requirements might seem trivial, but they add friction to everyday tasks and make things unnecessarily complicated for regular folks who simply want to get started investing and trading in cryptocurrencies.
Moreover, not everyone wants to spend hours researching cryptocurrencies each time they feel inclined to try something new. Therefore, it makes sense for traders to rely on simple tools that offer instant results without requiring extensive preparation upfront.
Thanks to DEX platforms like Uniswap and Pancakeswap, you can easily set up a crypto wallet and trade without much hassle. They take care of all the technicalities needed for seamless token conversions.
Another DEX advantage is that there’s no central authority that can suddenly tell you to stop trading. With centralized exchanges, there is always a risk they will suddenly halt your withdrawal or even deposit in case their companies go bankrupt. With DEX-es, you trade directly from your non-custodial wallet.
Using a decentralized exchange comes with certain risks, however. First, unlike conventional exchanges, you won’t receive professional support if something goes wrong. If you encounter issues, you’re supposed to resolve problems yourself.
Second, scams involving malicious actors tend to pop up quite often on decentralized exchanges. There are many fake tokens being deployed on popular blockchain platforms like Ethereum every single day. If you don’t put the right token contract address before you trade, you might get scammed.
Nonetheless, the pros outweigh the cons when considering the number of benefits offered by DEX platforms. Since you don’t need to worry about hackers stealing your private information and running away with your funds, you can focus solely on making informed decisions regarding investments. Plus, you avoid paying high commissions charged by centralized providers.
Finally, one thing worth mentioning is that decentralized exchanges typically charge lower transaction fees than centralized alternatives. So, if you decide to enter the crypto industry, you shouldn’t hesitate to give them a chance as soon as you have enough crypto in your non-custodial crypto wallet.
f you’ve read the above paragraphs carefully, you probably noticed that we hadn’t discussed much concerning wallet security. Well, keep reading this section to see how protected your funds really are.
When trading on a DEX platform, you use your own crypto wallet where the private keys are managed and known only by yourself. This feature ensures that your credentials remain isolated during every step of the process. This is different from centralized exchange accounts, where they never give you the private keys to your account.
One of the most popular non-custodial cryptocurrency wallets to be used with DEX-es is Metamask. You should go ahead and check our how to use metamask tutorial if you have zero experience with non-custodial wallets.
Lastly, while trading on DEX platforms, you never need to reveal sensitive information, including passwords, addresses, etc., to others. All communication takes place behind the scenes using encrypted messages. Besides, the majority of popular DEX platforms leverage advanced cryptography protocols to protect your details.
All in all, using a DEX gives you peace of mind knowing that your private info stays private. Moreover, you can rest assured that your funds aren’t at risk even if the entire system crashes since you can always access the smart contracts directly, even without a frontend.
Here’s the important question. How about the law? Generally speaking, the short answer is yes. Although it depends on how specific systems were designed. In general, DEX platforms adhere strictly to privacy laws enacted by regulators worldwide. In fact, they have to follow strict compliance guidelines imposed by authorities in jurisdictions where they operate.
Hackers rarely manage to breach the internal mechanisms of DEX platforms unless they resort to sophisticated tactics. Most of the hacks related to DEX usually involve some smart contract or oracle loopholes. This is where smart contract audit plays its role. You should only trust DEX-es that have been properly audited.
Yes and no. Let me explain why.
First, centralized exchanges handle most aspects related to trading. Consequently, they end up making huge profits off the table. Whereas decentralized exchanges leave much of their revenues generated from transaction processing fees to network participants.
Secondly, centralized platforms force clients to complete additional verification steps before completing orders. Despite offering 24/7 live chats, telephone lines, video calls, etc., they still demand users to upload scanned ID documents to prove their identities. Lastly, users have limited token options to choose from.
On the contrary, DEX platforms are highly customizable and anybody can list his tokens. It’s a wild wild west in the DEX world.
That being said, you still need to use centralized exchanges to swap your fiat to crypto or vice versa (from your crypto to fiat). Only after you have some crypto in your non-custodial wallet, you can start trading on DEX-es.
So, in case you already have your crypto in your wallet, you should prioritize DEX-es over CEX-es. But you would still need to use CEX-es to get in from and get out to fiat.