For instance, Telegram plans to build its decentralized exchange following the FTX issue.
First, let’s understand the decentralized exchange.
What is a Decentralized Exchange (DEX)?
Decentralized exchanges are decentralized applications (DApps) that allow you to buy and sell crypto assets without any middlemen. A direct transaction occurs between the buyer’s and seller’s digital wallets.
Decentralized exchanges use smart contracts to exchange crypto assets between users. Moreover, these exchanges offer transparency for all crypto transactions.
The trading process on DEX is also simple. You only need to visit the exchange, connect your wallet, and trade your tokens. As simple as that!
There are different types of decentralized exchanges; the major ones are:
On-Chain Order Books: This order book type of DEX executes transactions using the blockchain, and it is considered the most transparent and decentralized process.
Off-Chain Order Books: Unlike on-chain, this DEX uses a centralized authority to conduct transactions and govern the order book.
DEX Aggregators: Here, the data from various DEXs is compiled to increase liquidity to buy and sell crypto assets.
Automated Market Makers (AMM): These DEXs use smart contracts to create liquidity pools and execute automatic trades using algorithms.
Let’s have a look at why people prefer decentralized exchanges.
Advantages of Decentralized Exchanges Over Centralized Exchanges
The significant advantages of decentralized exchanges are:
If you want to use the features of a centralized exchange, it is mandatory to verify Know Your Customer (KYC). On the other hand, you can access a decentralized exchange without any user verification process.
You can trade your cryptocurrency without providing any personal details. This privacy feature safeguards you from identity theft.
#2. No Counterparty Risk
Unlike centralized exchanges, decentralized exchanges don’t hold your funds. This feature also helps prevent misuse of your funds, which recently happened with the FTX exchange.
Suppose you use centralized exchanges; you must deposit your funds on the exchange before trading. In this case, you are risking your funds with the exchange.
In contrast, your assets are safe inside your crypto wallet if you use decentralized exchanges. You only need to connect your wallet with the exchange when buying or selling.
#3. Lower Security Risk
Hacking cryptocurrencies is one of the major risks associated with centralized exchanges. For instance, the hacking of Mt.Gox, Bitfinex, and Coincheck are famous examples of such hacks that involved cryptos worth millions of dollars.
In the case of decentralized exchanges, your crypto assets are safely stored in your hot or cold wallet. Also, targeting an individual’s wallet is less feasible and profitable for hackers.
#4. Token Availability
Centralized exchanges only list a smaller number of crypto tokens. In addition, most such exchanges only support limited projects.
Meanwhile, you can trade new tokens with the help of decentralized exchanges. Decentralized exchanges come in handy if you want to buy a token at an early stage.
The top decentralized exchanges available are:
With over $3 billion in total value locked (TVL) of Ethereum, Uniswap is one of the largest decentralized exchanges. This DEX overtook Coinbase to become the second-largest Ethereum trading platform after Binance.
Uniswap DEX works based on an automated market maker (AMM) powered by smart contracts. You can swap any of your ERC-20 assets using Uniswap while remaining anonymous.
UNI is the native token of the Uniswap platform. You can use this token to obtain rewards and vote on governance proposals.
Apart from token swaps, you can be a liquidity provider and receive rewards. Uniswap charges trading fees of 0.3%.
Supported Networks: Ethereum, Optimism, Polygon, Celo, and Arbitrum.
Abhijith is a crypto and blockchain writer with a bachelor’s in electronics engineering. He loves to write crypto articles to educate and create awareness among his readers in an engaging way. Besides writing, he is interested in technical… read more