A Brief Introduction to Decentralized Exchanges.
You’ve probably heard a lot about centralization and decentralization in recent years and how web3 was created to tackle centralization. Centralization is basically putting the authority of making final decisions in the hands of a person or group of persons e.g. the CEO, Board of Trustees or Directors. Decentralization is the direct opposite of centralization. It is taking this authority, and spreading it in such a way that everyone has a say in the decision making process.
Basically, Decentralized Exchanges (DeX) eliminates the need for a third party in transactions. Users are able to exchange assets directly without the need of a bank or broker as with CEXs or centralized exchanges [this is called peer to peer trading]. All they have to do is connect to a decentralized exchange platform such as UNISWAP or PANCAKESWAP.
In a DEX, the central authority is replaced with a smart contract. Simply put, smart contracts are blockchain-based algorithms that execute when certain criteria are met. They normally are used to automate the implementation of an agreement so that all participants can be immediately certain of the conclusion, without any intermediary’s involvement or time lost.
Some Advantages of a Decentralized Exchange
If you still need any more convincing as to why DEXs are the future, here are just 2 things that i believe will seal the deal for you, as they did for me.
Privacy and Anonymity:
This is my favorite because users can maintain their privacy and anonymity on decentralized exchanges since they don’t demand that they fill out know-your-customer (KYC) forms. More cryptocurrencies and digital assets are available through DEXs than through a CEX because DEXs don’t practice censorship. In actuality, a large number of Altcoins are only traded on DEXs.
Direct Transactions:
Since Decentralized Exchanges don’t use a central server and the networks’ nodes are distributed, users are in charge. they can perform transactions whenever they want and directly to whomever they want without having to wait for confirmation from a third party.
Disadvantages Decentralized Exchanges
Most good things come with a sour twist and DEXs are no different (at least for now). Here is a two item list of what i consider major disadvantages of the DEX system.
No support:
DEXs do not have customer support systems you can reach out to if you encounter problems. For instance, you make the mistake of transferring some coins to a wrong address, there is no one for you to call and you have automatically lost your assets with no hope of regaining them. Some DEXs do have online communities though and people in these communities oftentimes offer to help or might sometimes even proffer solutions to your problems. They do this voluntarily.
Low Liquidity:
Users of DEXs experience severe problems due to low liquidity. Prices on DEXs and controlled exchanges might vary significantly. It can take some time to locate a matching order. This situation increases the hazards. Trading in big quantities on exchanges with little liquidity is risky, assuming it is even possible. Trading is significantly faster and safer because to the largest centralized exchanges’ high liquidity.
Here are the top 5 Decentralized Exchanges based off trading volume and liquidity.
- Uniswap (v3)
- DODO
- PancakeSwap (v2)
- Curve (Ethereum)
- Uniswap (Polygon)
In all, Decentralized Exchanges and the endless possibilities they offer, are wild. As they are relatively new, it is quite understandable that there are still so many things that need to be fixed but as time goes on, I believe these things will be sorted and we might all eventually adopt the use of DEXs.
