What is a decentralised exchange (DEX) and what are its advantages and disadvantages?
A decentralised exchange is yet another use case of blockchain technology. It allows users to trade crypto assets with one another on a peer-to-peer (P2P) network.
The most significant benefit of a decentralised exchange is that it can facilitate trade in practically all coins.
There are currently around 5000 coins in circulation. Many of these coins are still in their infancy, with low trading volumes - an important factor for centralised exchanges when deciding which assets to offer for trading.
A decentralised exchange is a cryptocurrency exchange that provides nearly all of the same or equivalent trading services as a centralised exchange. It is, nevertheless, distinct from centralised exchanges, and some believe it to be the trading exchange of the future. Decentralized exchanges currently account for around 5% of the crypto market.
Unlike centralised exchanges, DEXs rely on smart contracts to automate the majority of the operations. One of the key benefits of this system is that it can connect with products and services based on smart contracts, such as DeFi.
What is DEX not?
DEX is not the custodian of your funds or the private keys.
How is DEX a better choice?
A centralised exchange is a complicated structure that brings together all buyers and sellers to buy and sell digital assets. They all keep their individual exchange-provided crypto wallets and utilise them to conduct transactions. It not only centralises sensitive data, making it open to hackers and theft, but it also creates a monolithic organisation.
A DEX, on the other hand, makes things simple for everyone. It can accommodate all potential coins, including ones with low trade volumes, without increasing its operating costs. DEXs are based on blockchain networks that are largely open source. Cardano and Solana are two new blockchain networks that offer substantially more capacity, speed, and scalability at cheap transaction fees. DEX is a very appealing trading platform as a result of these new realities.
Here are a few more advantages of DEX:
You keep control of your money
A ‘trading account' is required to hold funds for stock purchases or to receive funds when selling equities on a typical stock exchange. The trading account on centralised crypto exchanges is an e-wallet provided by the exchange. Holding an e-wallet on a centralised exchange is fraught with counterparty risks due to cyber-security concerns.
The absence of an e-wallet given by the exchange to assist transactions distinguishes a decentralised exchange.
To execute trading transactions on a DEX, you do not need to transfer funds to a wallet or trading account. You keep control of your assets in this case, which is a vital aspect for a crypto platform that is vulnerable to hacking and theft.
It's completely safe and secure
As part of its everyday operation, a centralised exchange collects vital and sensitive data. Every transaction in your e-wallet, for example, requires the usage of a private key. Your private key information is registered and stored on the exchange's servers.
Trading on a decentralised exchange is possible thanks to the usage of an external wallet. Your private key information is not stored on the exchange's computers, providing you complete control over your wallet and cash.
It is less expensive
A decentralised exchange is typically less expensive than a centralised exchange, which must incur additional costs in setting up and maintaining infrastructure to provide consumers with dedicated and secure wallet services. Many of the exchange's sophisticated processes are now automated and self-regulated thanks to the usage of smart contracts.
A decentralised exchange makes use of the network on which it runs to provide low-cost services. New blockchain networks have emerged that are more efficient, have more capacity, and are more cost competitive. Customers may benefit from lower transaction costs if decentralised exchanges using these networks are used.
Summing up
The concept of distributed and decentralised decision-making is the most distinguishing element of blockchain technology. A crypto asset transaction is peer to peer (P2P) and requires confirmation from other network users. As a result, decentralised exchanges (DEXs) are a perfect fit for blockchain technology and have a lot of potential.
