What does it really mean, how does this type of exchange work and what are its strengths and weaknesses? Find out everything you need to know in this article.
Decentralized exchange: what is it?
A decentralized exchange allows you to buy, sell or exchange digital assets, including crypto currencies (Bitcoin, Ethereum…), but also NFTs, make Staking, etc. Unlike a centralized exchange, the DEX (Decentralized Exchange) has no intermediary between the buyer and the seller. In other words, transactions are peer-to-peer. No banks or financial institutions are involved in the buying and selling of crypto currencies.
The validation and verification of transactions is done by smart contracts that are based on the blockchain. These are programs that run automatically when predefined conditions are met.
Decentralized exchanges, an essential part of DeFi
Decentralized exchanges represent one of the essential elements of DeFi or Decentralized Finance. Indeed, thanks to these platforms, it is possible to make financial transactions completely autonomous without going through an intermediary and without the approval of any authority.
Overall, as DEXs become more prominent than decentralized exchanges, DeFi will become more and more established in the financial system. A movement that has already begun with banks and investment funds becoming increasingly interested in cryptocurrencies and their derivatives.
How does a decentralized exchange work?
Each DEX has its own native token. All users wishing to trade on a given platform must first purchase the altcoin(s) compatible with the ecosystem. It will serve as an exchange currency and allow the exchange to grow and finance itself over time. Some platforms also use them to pay for staking.
Since there is no intermediary such as a bank, no organization will provide equity to DEX. It is the users themselves who will build up these funds by encouraging them to finance what are known as “liquidity pools”.
This advantage can also turn into a disadvantage, especially when we see the recent setback of the Terra Luna project.
Why choose a decentralized exchange
Here are the main reasons why you should use a decentralized exchange:
- A wide variety of crypto-currencies available
- Fully autonomous operation
- Highly secure against hacking attempt
- Low or no fees
- Respect for your anonymity
- Full control over your crypto currencies
- Scalability issues leading to slower transactions
- Overall low liquidity
- Requires a crypto wallet
Conclusion: access the full potential of DeFi with decentralized exchanges.
To conclude, DEXs are numerous but little used compared to CEXs (Centralized EXchange). However, their role should grow and attract more and more users. Being an essential element for anyone wishing to interact with DeFi, the expansion of decentralized finance should mechanically benefit the main decentralized exchanges such as: Pancakeswap, Uniswap, dYdX, Balancer or the best and secure one is Venice Swap.