The financial industry has evolved substantially over recent years. Thanks to artificial intelligence and blockchain technology - people now have access to cheaper, more secure trades without an intermediary. While centralized exchanges still produce most trading volume, DeFi's surge in popularity as a viable alternative to traditional finance has allowed decentralized crypto exchanges (DEXs) platforms like Uniswap to provide increased trading options with preferable security convenience.
This article provides a definitive guide on decentralized crypto exchanges and assists in aiding users' knowledge and overall understanding of DEXs.
What are Decentralized Crypto Exchanges?
A P2P decentralized exchange is a crypto exchange allowing traders to transact online, buy and sell digital assets at a peer-to-peer level. In short, DEXs facilitate the purchase and selling of cryptocurrencies directly with other investors via an intuitive trading experience.
Unlike centralized exchanges (CEXs), decentralized exchanges (DEXs) operate entirely using smart contracts, meaning every transaction is transparent and tamper-proof.
While hybrid exchanges embrace centralized and decentralized protocols, a genuine DEX is designed to be self-regulatory or operate without intermediaries. Third parties, including banks and other financial institutions, are bypassed in favor of a distributed blockchain ledger with decentralized crypto exchanges.
Most decentralized crypto exchanges have adopted a peer-to-peer trading system, allowing the implementation of assets, proxy tokens, and an escrow system - comparable to the IOU-based processes familiar among centralized exchanges.
How do Decentralized Crypto Exchanges work?
Crypto exchanges provide DeFi with a much-needed source of liquidity, enabling billions in daily trade volumes. As demand for crypto tokens continues to rise - decentralized crypto exchanges are experiencing linear levels of growth.
Because DEXs operate independently of third parties, they rely on smart contracts to execute trades efficiently and at a minimal cost.
Decentralized crypto exchanges employ a non-custodial management style, meaning users are entirely responsible for managing their keys and wallets.
Categories of DEX Platforms
DEX platforms employ different implementations to manage their financial instruments.
1st generation DEXs implemented order books
These DEXs aggregate a list of all the open trade orders for a given digital asset. Using the spread between prices to discover the best market buy or sell price. Some popular examples include Binance and Nash Exchange.
Present DEXs implement liquidity protocols
Other exchanges use liquidity protocols instead of order books to produce price conclusions. The majority of these platforms are P2P and will execute trades within wallets right away in a process called crypto swapping. Our earlier article explains how the process of crypto swapping works and the best ways to get involved.
DEX aggregator platforms like 1inch are enjoying strong growth. Such decentralized crypto exchanges employ algorithms to view the order books of different exchanges, aiming for the best value price for the desired cryptocurrencies.
Are Decentralized Crypto Exchanges safe?
Decentralized exchanges are safe. However, following best practices relies on the users. If users employ rigorous wallet and transaction procedures, then safety is not an issue. If users utilize lackadaisical attitudes towards such processes, then the chances of assets compromise are higher.
A big reason decentralized crypto exchanges have become so popular is their lack of KYC requirements and non-custodial features. This is possible because DEXs allow users to execute transactions without the presence of third parties.
Centralized exchanges hold all user assets in a custodial account, and the exchange employs a dedicated team to oversee the operation of the platform.
A decentralized crypto exchange is a peer-to-peer model, so the community is tasked with operating the exchange, i.e., finding vulnerabilities.
It's important to note DEXs are built upon a publicly distributed ledger. Tracking transactions is not only more accessible - but more difficult to hack as there's no single point of failure as users are in receipt of their private key. So, every DEX user is responsible for their accounts, assets, and transactions.
Disclaimer: Only use verified exchanges like Uniswap or Sushiswap, and be sure to double-check every transaction you're about to make to protect yourself from phishing scams and asset losses.
Decentralized vs. Centralized Exchanges
While centralized crypto exchanges (CEXs) and decentralized crypto exchanges (DEXs) have pros and cons, the choice ultimately lies with the user's best interests. Whether it's a more effortless UI experience or increased privacy measures, factors relevant to user’s requirements will point to the right crypto exchange.
Management and Control
Centralized crypto exchanges like Coinbase have complete control and manage all operations within their platform. They provide the tech, updates, protocols, and support. Such practices prove convenient should users require help and recover a lost password and funds.
However, centralized crypto exchanges are prone to illegal activities like price manipulation and fake trading volumes.
As CEXs are large organizations with employees and several business expenses, including equipment and primarily security of assets, CEXs operating expenses are often costly.
Decentralized crypto exchanges don't adhere to the same strict principles, making their onboarding process more accessible.
DEXs are often cheaper to execute trades, as users are in complete control of their accounts, and there's no third-party payroll for consideration.
Regulation
Accordance with regional laws allows centralized crypto exchanges access to licenses and approvals from regulatory bodies that decentralized crypto exchanges would otherwise find challenging to obtain.
KYC is mandatory on the biggest centralized crypto exchanges, as well as proof of address and verification. With decentralized crypto exchanges, such procedures aren't required.
The lack of regulatory reach among decentralized crypto exchanges makes it easier for exit scams to occur, i.e., when founders close the project, remove liquidity and escape with people's assets.
Benefits of Decentralized Crypto Exchanges
DEXs are better at keeping personal data safe and private
Centralized crypto exchanges require sharing sensitive information such as passports, driving licenses, bank statements to be mandatory due to KYC. The storage of millions of users' highly personal information on one platform means a hack or compromise of the centralized exchange could result in the information becoming public and causing harm for users.
While most banks and financial institutions equip their systems with sophisticated encryption and anonymizing technologies, implementing hack-proof cryptocurrency asset storage technologies for public-facing platforms is complicated because of the increased number of attack vectors.
Top 5 Biggest Centralized Crypto Exchange Hacks Ever
With decentralized crypto exchanges, traders don't need to submit their sensitive personal information to an intermediary due to non-existent registration requirements. And while DEXs still face significant complexity and scalability issues, their data privacy protocol could be beneficial for the future of finance.
DEX Transactions are cheaper
Global unbanked population figures are high because fees associated with running and maintaining an account are expensive. This creates an entire ecosystem where many willing buyers can't participate. Decentralized crypto exchanges try to solve this issue using AMMs (Automated Market Makers). An innovation that's designed to replace traditional order books for pre-funded liquidity pools.
The Downside of Decentralized Exchanges
Decentralized crypto exchanges are the pillars of DeFi, but as with any advantages, there are disadvantages.
Issues with reliability
Because DEXs use a non-custodial framework and users maintain complete control of their wallets, it's almost impossible to retrieve the funds if their key is compromised and/or assets stolen. Any mistakes during the trading process often leads to significant impacts for the user.
There are ongoing rug pulls and exit scams with decentralized crypto exchanges due to non-existent KYC and/or AML regulatory standards.
Top 5 Biggest DeFi Hacks Ever
Lack of liquidity
Low trading volumes make decentralized crypto exchanges very illiquid. Trading is often tricky, especially during a mass panic, such as a hack or flash crash.
Additionally, most decentralized crypto exchanges don't fully support fiat currency conversion.
DEX Development
Despite being a nascent technology and user experience issues persist, Common examples include:
DEXs have a bright future. DEXs will continually enjoy a large user base willing to use their features by emphasizing freedom and privacy. And due to the ongoing regulatory uncertainty surrounding CEXs, more users will naturally gravitate towards DEXs.
The Best Decentralized Crypto Exchanges
Before we list our favorite DEXs, not all decentralized exchanges are the same. Some platforms prefer order book models, while other exchanges use liquidity protocols to manage trading activity.
Here are our five favorite decentralized crypto exchanges:
Uniswap ($UNI)
An Ethereum-based decentralized exchange, where users can trade ERC-20 tokens.
Users can swap over 5500 coins, including AAVE, WBTC, ETH, DAI, and USDT.
PancakeSwap ($CAKE)
Created using Uniswap's source code. PancakeSwap supports tokens on Binance Smart Chain (BSC), meaning users trade using BEP-20 tokens.
Compound ($COMP)
A specialized interest rate focused on allowing users to earn passive income off stored tokens. Compound doesn't charge any fees and includes support for DAI, UNI, ETH, LINK, USDT, UNI & BAT.
SushiSwap ($SUSHI)
An AMM protocol forked from Uniswap that enjoys incentives such as revenue sharing mechanisms and governance rights and scarcity.
Users can swap 40+ supported tokens, including ETH, ERC20, YLD, UMB, ANY, and LDO
1inch ($1INCH)
A decentralized exchange aggregator developed to compile the best prices for any token swap.
1inch works with wallets outside the 1inch wallet, including MetaMask, MyEthereum wallet, and Binance Smart Wallet.
Final take
Crypto's rapidly expanding nature ensures DEXs will continue to enjoy prominence and popularity. Many suitable decentralized crypto trading options exist, and they'll undoubtedly increase over the coming months and years. And remember, do your own research!
Frequently Asked Questions (FAQs)
What is a decentralized crypto exchange?
A decentralized crypto exchange (DEX) facilitates crypto trading on a peer-to-peer level without the need for an intermediary.
What is the best-decentralized crypto exchange?
There are several great options for DEXs. We discuss the merits of each one in the earlier section.
How does a decentralized crypto exchange make money?
Different decentralized crypto exchanges have unique business models, but the most popular method involves the DEXs charging accounts a small fee of ~0.1% to their wallets.
Is it better to use decentralized exchanges over centralized exchanges?
Centralized exchanges operate from the company's database, which is risky due to the single point of failure possibility. Decentralized crypto exchanges are mostly hack-proof and anonymous.
$RELI Uniswap contract address: 0x0E58ED58E150dba5fd8e5D4A49F54C7e1E880124
Note: Please be aware that the only contract address for RELI is that stated above. There will be fraudulent versions of RELI. If in doubt, please ask an admin in the Relite Community.
Note: Please be aware that the only contract address for RELI is that stated above. There will be fraudulent versions of RELI. If in doubt, please ask an admin in the Relite Community.
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