Decentralized exchanges appeared much later than their centralized competitors. They have new unique solutions and properties that have taken the use of cryptocurrencies to a new level. Such exchanges have greatly influenced the development of the cryptosphere and, in fact, marked the creation of the DeFi (decentralized finance) sector in cryptocurrencies.

What are decentralized exchanges?

 

A decentralized exchange, or DEX, is a platform that provides the ability to exchange one cryptocurrency for another, provide liquidity for other exchanges, as well as engage in staking and farming. About everything in order.

In essence, DEX exchanges are very similar to the centralized exchanges that I discussed in my previous article. You also have the option to make an exchange. However, the way this exchange takes place from a functional point of view completely overlaps all other possible similarities between DEX and CEX exchanges.

How do DEXs work?

 

In decentralized exchanges, you do not need to register, create an account, verify and deposit funds to your exchange wallet. It is enough just to connect one of your browser wallets that supports one or another blockchain. For example, you can connect your Metamask browser wallet to the most popular Uniswap exchange, which runs on the Ethereum blockchain. All exchange transactions that you will perform on the platform will immediately go through your wallet. One currency will be debited, another will be credited, no extra actions are needed!

How does the exchange take place from within? Where do you send funds from your wallet in the form of one token, and where do you receive another? There is such a thing as liquidity. Liquidity is the amount of funds of an asset that is frozen in the exchange pool. That is, having exchanged your USDT, they are sent to the liquidity pool of the USDT/UNI pair, and UNI are taken from this pool and sent to your wallet. Often, for unpopular pairs of assets, liquidity can be too small, which will change the cent of the asset even from the slightest exchange.

In addition, on decentralized exchanges, you yourself can provide liquidity to any pair you are interested in. You send equal amounts of these assets to the pool of USDT/UNI pairs, and other users use your provided funds when making exchanges. For this, you receive a part of the exchange commissions from exchanges.

illustrative example

Decentralized exchanges operate a little more complicated than centralized ones. Therefore, I propose to analyze on an abstract example how exactly to make an exchange. Take the Uniswap exchange and the Metamask browser wallet.

First you need to connect your wallet to the platform and allow it to work with your funds. After that, select any existing pair. For example USDT/UNI. You have USDT in your wallet and want to buy some UNI exchange tokens. Enter the desired amount of USDT and the exchange will give you the equivalent in UNI. First you will need to confirm that you have a certain token in your account (USDT in our case). To do this, click “Approve”. A Metamask wallet will pop up and you need to confirm the transaction to validate your holdings and pay a hefty Ether fee for the network transaction itself. The exchange takes a small commission.

Then you will have a “Swap” button and you will need to do the same, paying a commission now for the exchange of assets again. After that, UNI will immediately appear on your Metamask wallet.

Decentralized Exchanges: Benefits

After we figured out the functionality of the exchange, and how exactly it works, and how exchanges take place on it, we can analyze: what are the advantages and disadvantages of such exchanges?

Let’s start with the benefits.

  1. You do not need to leave any personal data to use the decentralized exchange. There is no system of registration and verification of identity by documents. For those for whom cryptocurrency is primarily anonymity, this is one of the main advantages.
  2. Your funds are personally yours, as they are stored in personal crypto wallets, and not in the wallet of the exchange account. The creators of the DEX exchange, even with all their desire, will not be able to take your funds in any way, since they actually do not have access to them.
  3. Decentralized exchanges do not have a single control center, therefore they are much more secure, and also not subject to decisions, for example, about changes, by one person or group of people.
  4. The absence of any limits and restrictions. There are no restrictions on trading, depositing, withdrawing funds, there are no geographical restrictions, and no one can limit the performance and functioning of such exchanges.

Thus, we see that DEX exchanges are fully cryptocurrency exchanges on the blockchain, since they have all the functions of the crypto world: anonymity, security, limitlessness, decentralization.

Disadvantages of DEX platforms

 

DEX exchanges are more secure and have more functionality for “flying” and earning. However, they have enough cons, and most of them are related to convenience and commissions.

  1. Probably, one of the main disadvantages of DEX exchanges is their “handiness”, simplicity and ease of use. And first of all, we are talking about the lack of many really useful tools for trading. On DEX exchanges, there are no majority trading, stop losses, lending, orders that will allow you to buy or sell a crypto asset automatically when you reach the price you need.
  2. In addition, decentralized exchanges provide pairs of crypto assets within the selected blockchain. If you have chosen the Ethereum blockchain on the exchange, you can directly change only the assets that exist on this blockchain. It will not be possible to directly exchange ether for bitcoin, since these are different blockchains. You will have to use special services or buy an alternative to bitcoin on the ether network. This is not always convenient, especially if we are talking about trading for beginners.
  3. The functionality of such exchanges is more complicated than that of their centralized competitors. You need to understand more concepts, take care of the security of your browser wallet.
  4. Sometimes there is poor liquidity on DEX exchanges, especially with less popular pairs. Again, this brings inconvenience to the process of trading and buying assets.
  5. Own security. You may also lose access to your wallet, which contains your crypto assets, as well as access from your exchange account on a centralized exchange. But if in the case of CEX exchanges, thanks to the verification procedure, you can restore access to your account, and hence to the funds, then your personal browser wallet will be lost forever (if you lose access and passwords).
  6. Large commissions when performing any action on the Ethereum network. Here it must be emphasized that the commission is not charged by the exchange, but by the blockchain itself. But in order to make an exchange, it still needs to be done. And now it can hit the pocket hard, so, for example, it is unprofitable to buy a small amount of assets.

Exchange DEX Examples

Examples of decentralized exchanges Photo: Burak Kebapci / PexelsExamples of decentralized exchanges Photo: Burak Kebapci / Pexels

  1. Uniswap . The largest and most popular decentralized exchange, an analogue of Binance in the centralized sector. The very first DEX exchange, has the largest number of trading pairs and their collateral and liquidity.
  2. Sushswap
  3. Pancakeswap
  4. 1Inch 
  5. TraderJoe

Where are they used and who are they suitable for?

As a result, it becomes clear that decentralized platforms are more suitable for users who are at least a little familiar with cryptocurrencies. For anonymity, security, lack of control by any authorities, people pay with minor inconveniences in use (compared to centralized exchanges), which are not a hindrance to experienced users.

It turns out that both decentralized and centralized exchanges meet their objectives. Some are suitable for safe asset purchases, others for faster and more convenient trading.

I advise you to use all the options of crypto exchanges. Just follow all safety and precautionary measures with each of them.

You can conveniently trade on centralized platforms. Quickly buy and sell any assets, use majority trading. But just don’t store a lot of money there. You can also go to any DEX exchange and purchase an asset there: fast, safe, without registration and verification. Just consider liquidity and commissions