DEX – What is a Decentralized Exchange?
Many of you may have come across the term Decentralized Exchange (DEX) online, and are curious to find some answers. Well, this article will help you acquire these answers and gain a brief understanding of what a DEX is, how they work and their benefits & limitations. However, before we dive into the topic, we must understand the difference between a Centralized Exchange (CEX) and a Decentralized Exchange (DEX).
What is a Centralized Exchange (CEX)?
A Centralized Exchange is an online platform where individuals can trade cryptocurrencies through FIAT. These exchanges are fully centralized and operate as a custodian over your private wallet keys & your funds. A custodian is essentially an entity that has full overview and control over your funds, as well as the responsibility to safeguard your account. Centralized Exchanges require you to use personal information and are considered to be highly regulated environments.
Well-known CEX platforms include Coinbase, Binance, and Kraken.
What is a Decentralized Exchange (DEX)?
A Decentralized Exchange (DEX) is a peer-to-peer (P2P) marketplace where individuals can execute crypto/financial transactions between each other, without the use of an intermediary or custodian such as a broker or bank.
Examples of a DEX platform include UNISWAP and Pancakeswap.
How Does a DEX work?
In a Decentralized Exchange, there is no possibility to trade between crypto and fiat on the platform. Instead, a DEX allows individuals to trade specific cryptocurrencies/tokens with each other, without a third-party intermediary. It allows individuals to carry out transactions from their private wallets by interacting with a set/series of smart contracts, built on a blockchain network. In order to facilitate this exchange, investors lock their funds onto the DEX and provide liquidity pools, in return for a trading fee (percentage which ranges per exchange). In a DEX, the individual is responsible for their wallet safety and funds. This means that you are held accountable for sending money to the wrong address, or giving away/losing the private keys to your wallet (same for CEX).
Benefits Vs Limitations of a DEX.
· Offer a large variety of coins/tokens to trade
· Anonymity offered – no need for personal information like names or physical addresses
· Reduced risk of getting hacked
· Responsibility on the individual
· Certain exchanges can lack liquidity
Decentralized Exchanges may be something relatively daunting and new to people due to its complexity, but it is certainly gaining popularity. The idea of being able to carry out transactions anonymously is increasingly valued in a day and age where all financial related things involve giving out your personal details.