Decentralized exchanges may very well be the future of cryptocurrency trading. They allow users to trade cryptocurrencies directly from their own wallets, thus eliminating the need for an intermediary party. They also help improve security and privacy by not requiring users to expose their private keys. With that said, decentralized exchanges are still in their early days and have yet to see any mass adoption. Let’s take a closer look.
Decentralized exchanges (DEXs) offer advantages over centralized exchanges, such as better security and more transparency. Centralized exchanges are vulnerable to all kinds of attacks. Hacks, government intervention, censorship and competitors can all take down centralized exchanges. For example: Hackers are constantly trying to break into the servers of centralized exchanges and steal their customers’ money. More than $700 million has been stolen from cryptocurrency exchanges in the last 10 years. And as long as there’s money involved, hackers will be working overtime on figuring out how to exploit weaknesses in these systems for personal gain.
What about regulations from large entities, such as governments? Well, since most centralized exchanges are based in one country or another, government intervention can shut down whole trading platforms overnight if they don’t play ball with regulators’ demands.
Decentralized exchanges are a safer, more secure way to trade. You can keep your tokens in your own wallet and not have to worry about an exchange getting hacked or going out of business.
They also allow you to access new coins that wouldn’t be available on centralized exchanges, as well as provide better liquidity for trading pairs between different cryptocurrencies.
For example, if you want to trade bitcoin for ether but the only crypto-to-crypto pair offered by Coinbase is BTC/USD (dollar), it might take days before someone buys all the bitcoins from you at that price and then sells them for ether in return. On a decentralized exchange, however, there’s no need for dollars or even fiat currency at all—you just buy into the market and sell when necessary. Pretty neat, huh?
So, are these decentralized exchanges without flaw? Nope, not quite. Even though they offer solutions to some of the issues poised by centralized exchanges, they have some problems of their own.
The main issue with DEXs is that liquidity is still an issue. As a result, there are still some concerns about market manipulation and price volatility. Liquidity can be defined as the ability to buy or sell a cryptocurrency at a reasonable price. The more liquid an exchange, the more likely it is that you will be able to buy or sell your coins at a reasonable price.
This lack of liquidity has contributed to issues like flash crashes on decentralized exchanges (where prices fell rapidly). This can occur when someone sells off their entire portfolio all at once before others have time to react, causing prices to crash almost instantly because there weren’t enough other people willing to buy at those levels.
All in all, the most important advantage of DEXs is that they require no central authority to operate them; all transactions happen directly between traders who own their funds outright rather than placing them on deposit with a third party. As such, DEXs are not subject to the same risk of loss from theft or fraud that plague centralized exchanges. Additionally, DEXs do not charge trading fees so traders can save on costs compared with centralized exchanges where trading fees can run up into hundreds of dollars per day depending on volume traded.
If you have understood the protocol, and are confident in the security of the exchange, then a DEX is probably a good place to trade. If you understand that liquidity issues and market manipulation are a real concern, then a DEX may be ideal for you!
The decentralization of exchanges is a very important and exciting step in cryptocurrency. Not only are more people learning about the benefits of decentralization and being exposed to new ways of trading, but there are also more players entering this space every day. As always, though, there’s still room for improvement. In closing, we think it’s great that there are so many options out there for people who want something more secure than what centralized exchanges offer. To learn more go to Digital.World.
