Decentralized Exchange (DEX) In a Nutshell
Anyone who has been in the world of crypto for more than 5 minutes knows that the idea of decentralization is one of the industry’s main drivers. We concur! While centralized exchanges help crypto achieve global adoption in its own way – mostly because of the big trustworthy names – decentralized exchanges are a great opportunity to actually make a difference in the global financial landscape. In this article, we will talk about what a DEX is and discuss its main advantages.
What is a decentralized exchange?
Simply put, a decentralized exchange enables buying and selling cryptocurrencies without an intermediary. Swap happens directly between a buyer and a seller, peer-to-peer (P2P). To avoid mishaps, smart contracts are used to ensure every end receives its part of the transaction.
Investopedia offers a very simple yet accurate definition of a smart contract: ‘’A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.’’
Decentralized exchanges lean on the principle of trustlessness – the idea that a system doesn’t need anyone, individual or an institution, in order to function.
People opt for a DEX for different reasons – privacy is one of the main advantages because this is where centralized and decentralized exchanges differ a lot. The other very important reason is lower transaction costs and fees.
Decentralized exchanges are not just for ‘’the selected few’’, the keenest crypto enthusiasts who know how to find them. As a matter of fact, the total daily volume on DEXs equals around $4 billion, with more than 100 million active daily users.
A lot of countries around the world have strict regulations and therefore, are not very crypto-friendly. DEXs enable people from all over the globe to trade freely and anonymously, which is a very attractive option.
Of course, there will always be negative comments such as ‘’DEXs are used for money laundering’’ or certain people who will connect them with other illicit activities, but make no mistake, frauds and financial crimes were being committed long before the surge of decentralized exchanges.
It’s never the instrument’s fault, but people’s. And yes, DEXs often tend to have looser rules in terms of KYC/AML, but they definitely are not a roaming consequence-free environment. You cannot trade infinite amounts of money without giving your personal data, plus every transaction leaves an indelible trace in perpetuity.
Speaking of security, there is a common saying that DEXs are almost impossible to hack, and thus, much more secure than centralized exchanges. But is this a truth or a myth?
Actually, yes, this makes perfect sense since you have no third party in the process, no intermediary that can be a target of a cyberattack – only you and the person you are trading with, with a help of a smart contract. Additionally, since the KYC is not required, there is no fear of identity theft.
Nonetheless, it is important to highlight that, yes, DEXs are more secure than centralized exchanges (CEXs), but they are still not perfect. Depending on the exchange, some security omissions might happen, and there are ways to ‘’take the money and run’’.
On the other hand, such endeavours are much harder to achieve and require an advanced level of technical knowledge. So, attacks are always possible but your funds will be much safer in a DEX than in a CEX (which Binance and Liquid hacks have shown).
Liquidity pools and fees
Now, there wouldn’t be DEXs without liquidity pools that enable exchange users to make buying/selling orders. So, how does this crucial mechanism work?
Just imagine a liquidity pool as a closed space filled with money – in this case, tokens. Liquidity pools are crowdfunded, meaning that people willingly put their money into a pool so that trades can be made. Why would they do that, you might ask, and the answer is simple – it pays off. You don’t have to be an altruistic person, just a smart one.
DEXs incentivize people to pour their assets into DEXs liquidity pools and it works like a charm – a DEX has tokens to trade, users can make successful transactions, and liquidity providers earn an interest rate for their money in the process. Like a big happy family.
As for the fees – the crucial difference is whether you need to pay Ethereum’s gas fees or not. While DEXs original home was Ethereum blockchain, many of them migrated to other blockchain networks that enable cheaper transactions. Without the gas fees, DEXs represent a fairly cheap option compared to their centralized siblings, another very practical reason for users to join.
Regulation and KYC
The best part about DEXs is that anyone with an Internet connection can join them, absolutely anywhere. Since DEXs are, well, decentralized, there is no central database that the authorities can ask access for. A DEX holds no user records and even if forced, there is no way they can give information away.
KYC/AML requirements simply don’t apply for decentralized exchanges and therefore, are not needed if you wish to use a DEX for trading cryptocurrencies.
Secondly, many centralized exchanges struggle with the regulation policies of sovereign countries – since they are centralized, they simply need to comply with the law 100%. Sometimes, the law is biased against crypto and sometimes, there even is no clear crypto regulation. DEXs easily jump over these hurdles simply due to their anti-monopoly nature. Power is not accumulated in one place and thus, cannot be taken away.
DEX as an opportunity for new crypto projects
So far, we have learned that DEXs are great for users, but they can be an amazing opportunity for new crypto projects. Listing on the mainstream CEXs can be challenging for new projects that mostly lack funding in the first phases of their business development.
Luckily, DEXs run on the liquidity pools we have previously mentioned and this mechanism is much more suitable for a young crypto project. Plus, DEXs have active and highly engaged communities and if a hardcore crypto community says you’re the new sexy, the entire world will go crazy over your project.
It is much easier to become a competitive project on a DEX than on a big centralized exchange, and it is far cheaper, too. As for the community building, here you won’t be just another drop in the ocean, here you will be able to find an audience curious to learn more and support you if they found you credible.
Whether you are a user or a project representative, choosing DEX could be a life-changing decision. Luckily for you, we know just the right one – dexvers.
dexvers is meant to be beneficial for all parties involved, from users, listed tokens, liquidity providers, to community members. When there is no single individual to reap all the fruits, everyone gets something. Join us now, here’s how!
Disclaimer: The information provided in this post is not legal, accounting, or financial advice. The information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.