From the onset, cryptocurrency evolved from a decentralized platform. However, the decentralized blockchains needed crypto exchanges to facilitate transactions between sellers and buyers of digital currency.
These exchanges were third party companies that matched similar buy-sell orders from the users of a given blockchain. It all started with centralized exchanges (CEXs) that had a central control.
However, the CEX’s were prone to hacking and unprecedented shutdowns, and traders were wary of using them as conduits for their currency. Their inherent challenges gave reason for the development of decentralized exchanges, especially between 2018-2020.
Defining A Decentralized Exchange (DEX)
DEX refers to a decentralized crypto exchange that uses the peer-to-peer approach to facilitate a trade between a digital currency buyer and seller.
They employ specialized software services, which automatically links a buyer and a seller depending on their orders. The software eliminates the necessity of human input as in the old-fashioned centralized crypto exchanges.
Although some DEXs were beaten by CEXs in the function of converting fiat currency into cryptocurrency at the outset, current innovations are seeing DEX’s offer the conversion service.
Benefits of A Decentralized Crypto Exchange
Malicious actors frequently target CEX’s due to the massive amounts of deposits they are currently getting from investors.
For instance, five years ago, Bitstamp a centralized exchange with its offices in Slovenia, was a casualty of a 5 Million US dollars loss to a hacker. The hacker managed to get a means of entry to Bitstamp’s operational wallet. Decentralized exchanges provide user-friendly platforms with increased security.
Control Over Deposits
Investors don’t enjoy full control of their deposits in a centralized crypto exchange. CEXs are custodial. They could mismanage the funds and impose restrictions on the deposits’ access by freezing the user accounts or even shutting down the exchange in extreme cases.
On the other hand, decentralized exchanges are non-custodial. The investors have control over their funds even in the event of a collapse of the exchange.
Privacy of User Information
With a primary form of governance, DEXs users only need a wallet address to operate in the exchange of virtual currencies.
Mandatory guidelines and anti-money laundering checks native to the CEX do not feature in the DEX. The KYC and the AML information could be inaccurate due to investors’ reluctance in exposing their personal information to a third party.
Apart from the standard cryptocurrency exchanges, decentralized finance (DeFi) focused exchanges are making it to the top of the list. Popular DeFi platforms include Uniswap which has a 66.32% lion share in the exchange market. Curve Finance comes second with 13.51% ahead of Compound, which has a 4.51% market share.
Other crypto exchanges that make it to the top are 0x Protocol, JustSwap, Tokenlon,1inch Exchange, PancakeSwap, Kyber Network, and Balancer in the order of their prominence.
Decentralized exchanges are complementary to the decentralized concept of blockchains. Their upward growth trajectory seems very likely in the future, perhaps stifling the CEX’s to extinction.
Decentralized exchanges are reportedly prone to fraudulent traders, slow trading processes, and limited liquidity. However, we might see a flurry of initiatives to patch these loopholes for a more secure platform! In the meantime you are better off using CEX’s. Do you have troubles finding one? Check out CryptoPrijzen where you can compare cryptos and exchanges.
We hope to see that DEX’s will gain more ground or that zero fee trading will be available worldwide (just like Robinhood).