25. What are Decentralized Cryptocurrency DEX Exchanges?
DEX, is a decentralized exchange, which appeared in the world of cryptocurrencies some time ago. Definitely different from centralized exchanges (CEX). Today we will tell you how they work, what they are characterized by and whether it is worth using them. We invite you to read!
DEX decentralized exchange – definition
Decentralized Exchange, abbreviated DEX. It is a decentralized cryptocurrency exchange that, as the name suggests, operates without the involvement of third parties. Trading using cryptocurrencies takes place directly between interested investors, i.e. in mode peer-to-peer.
DEX-y are nothing but applications that rely on blockchain. They enable and coordinate large-scale trading of digital assets. Everything is done using automated algorithms.
They do not use intermediaries between the seller and the buyer. Algorithms that are used in DEXs are smart contracts that trigger “exits” upon receiving certain “outputs”.
The idea of decentralized exchanges is simple. They want to eliminate the intermediaries between transactions so that users do business directly with each other. Using this kind of DEX exchange, you don’t have to transfer your assets to it. Everything is securely located on users’ wallets, which further increases their security. Using DEX also prevents price manipulation and counterfeiting of trades. Trading in this market is simple and user-friendly.
There’s no denying that DEX-y are the biggest decentralized applications. They usually operate on a conventional basis in stock exchange books. What does it mean? Based on the ledger, buyers, and sellers are matched against each other based on data such as order prices and volume. We all know that full decentralization is the key to success when it comes to the industry of cryptocurrencies.
Each DEX is more advanced than CEX. Why? If only because of the privacy that DEXs provide on a large scale. User wallets, balances, and transactions are private and safe in this asset market. What’s more, making transactions between investor A and investor B in decentralized exchanges gives us a sense of greater individuality and independence.
As we have already mentioned, DEXs are managed with smart contracts (then they are said to be fully automated) or with the involvement of programmers and the community (then we mention semi-automated exchange).
Decentralized exchanges match requests to buy/sell digital assets. Moreover, some DEXs allow staking and farming.
DEX vs CEX
We already found out what they are, decentralized exchanges (DEX). It is worth highlighting the basic differences between them and centralized exchanges (CEX).
- CEX, is a traditional exchange that has its board of directors and keeps user data confidential.
- The algorithms used to operate CEX store the trading history of the exchange, users, and control its work.
- DEXs have no governing body. They are fully automatic or semi-automatic.
- DEXs are based on automatic market creation protocol. Thanks to this, the price of a given asset is determined using an algorithmic write function. CEXs use historical transaction data of their users for this analysis and pricing. The CEX exchange is entirely different from the traditional and well-known cryptocurrency exchange.
- In decentralized exchanges, they require the minimum steps you need to take to trade them.
- In the case of CEXs, you must go through the entire registration process and verify your identity.
- When trading on decentralized applications, the whole process is done in peer-to-peer mode. And they pay for the transaction.
- Speaking of differences, it is also worth looking at the commissions offered by these exchanges. In the case of DEX, its height is dynamic and largely depends on the amount of traffic on the blockchain. There are also no intermediaries between them, so the commission is lower than in the case of centralized exchanges.
Advantages and disadvantages of DEX exchanges
|They ensure complete anonymity. KYC registration and authentication is not required.||They do not have a security deposit, which in turn limits their functionality.|
|We do not store our funds on DEXs, which is why they are completely safe. In the event of a hacker attack or even a collapse of the stock exchange, you risk nothing.||The liquidity pool is definitely smaller than in the case of CEXs.|
|A hacker attack is virtually impossible. Why? Because DEXs operate on a distributed ledger.||We have no technical support in case of error or our mistake.|
|No governing body.|
Are DEXs really completely safe?
No doubt, their popularity has increased thanks to anonymity and full decentralization. However, when we take a closer look at them, they really are decentralized exchanges that have a shadow of centralization. We are talking here, even about oracles, smart contracts or so-called administrator keys. It is true that the use of smart contracts gives users of decentralized applications full control over their funds. Thanks to this, the risk of theft or loss of funds is minimal.
The best DEXs
- UNISWAP – decentralized cryptocurrency exchange platform. It is based on blockchain Ethereum and uses smart contracts.
- PancakeSwap – DEX, which was created on BNB Chain. It is based on the model of an automatic market maker(AMM). What does it mean? That you are trading against the liquidity pool because there is no order book in PancakeSwap.
- SushiSwap – in addition to the fact that we can trade digital assets on it, SushiSwap offers us many tools for passive and active earning.
- 1inch – decentralized protocol is based on algorithms that analyse and search for the most profitable investment offers for its users.
- Curve Finance – if you dislike risk, this platform is perfect for you. On CRV you will find stable and less volatile assets. It focuses on stablecoins and their exchange.
You already know the basic differences between DEX exchanges and CEX. If you value security and anonymity, trading with decentralized applications is a better choice for you. However, remember that DEX-y are not regulated in any way – neither legally nor physically.