Trade Directly – The Rise of Decentralized Exchanges

At present, centralized platforms prevail in the crypto sector, but decentralized platforms are becoming more and more popular. They enable peer-to-peer (P2P) buying and selling by using smart contracts, meaning no third parties are required. Nonetheless, not all decentralized exchanges use one basic infrastructure. Some of them keep traditional order book models, while others leverage emergency liquidity protocols.

Currently, IT specialists are developing advanced aggregation instruments to settle the fragmented liquidity issue existing in all decentralized platforms, bringing innovation to what is an exciting new space. In this blog post, we’ll take a deeper look at decentralized exchanges, their features and benefits, and what the future holds for this exciting space. 

What is a Decentralized Exchange (DEX)?

A DEX is a virtual currency platform that enables straight P2P transactions with virtual currency. As stated above, DEXs enable holders of digital currencies to trade without handing control of their funds to a third party.

At first, DEXs were designed to remove the need to control and allow trades executed on a specific platform. DEXs use smart contracts to manage self-regulating order books and trades.

What Are the Main Benefits of Decentralised Exchanges Over Centralized Exchanges?

There is very little difference between a centralized and decentralized exchange. Although the latter gives a chance for traders to have absolute authority over their assets, they usually do not provide customer support. In turn, centralized platforms provide quality customer support and are more user-friendly. Although they handle higher trading volumes, traders do not have absolute authority over their assets.

Anonymity – Trades executed within DEXs never transfer data to any go-between, preserving the information and confidentiality of users. By contrast, centralized exchanges request personal data (e.g., passport data, photo verification) when registering on the exchange.

Safety – The greatest benefit of DEXs lies in their improved safety. For this, the digital currency has been submitted that enables users to supervise the running of their assets. Less than half of DEXs have centralized management servers. Instead, information is shared amongst the nodes in the network, meaning there is no single point of vulnerability or failure. Consequently, it remains more secure and less likely to become hacked.

Asset conservation – In case some long-established exchange stops operating, authorities may seize all funds and user accounts. The same can not happen on a DEX as it is based on a distributed network.

Are Decentralized Exchanges Cheaper?

Buying and selling on decentralized platforms often involves lower commissions than doing so on centralized platforms. However, with traders constantly monitoring the rates for the best price to sell their assets at, centralized platforms are reconsidering their commissions to retain a competitive advantage over decentralized exchanges.

Centralized exchanges charge traders for their service. These commissions differ from one platform to another, depending on their features. As a rule, DEXs have either no fees or very small fees for pairing buy orders to sell orders on the blockchain.

In contrast with centralized platforms, decentralized exchanges require very small amounts of money for maintenance. Because they do not need to offer hot wallets to traders, the price is significantly reduced. DEXs require funds to support themselves, but they can be raised by taking low fees once a trader commits a transaction.

Are Decentralized Exchanges Safe?

While decentralized platforms remove technical trade barriers, safety should not be compromised.

Decentralized exchanges are only as safe as their code. Considering that there are no legal barriers to creating a decentralized application, you should do your research to understand which exchanges are secure and trusted by users. Unsurprisingly, the bigger players such as Uniswap, BinanceDEX, and Sushi have better security ratings than smaller competitors.

While platform safety is one factor, there is also the issue of operating in an arena that offers little recourse to stolen funds. While one of the benefits of decentralized exchanges is that you are in control of your funds, this comes with risk if you are to make a mistake or are scammed when trading, as most DEXs don’t have a policy of recovering losses. Technical issues such as slippage, transaction delays, and lack of real-time trading data may not be such a big deal in comparison with the listing of scam tokens, which can result in the loss of all your funds.

The TOP 5 Decentralized Exchange Platforms in Crypto Trading

When looking for a decentralized bitcoin exchange to trade with, you should consider the reputation, supported assets, liquidity, and security.

  1. Curve Finance is an Ethereum-based decentralized platform. It is purpose-built for exchange between stablecoins. For this, users need an Ethereum wallet and assets to exchange different cryptocurrencies with low commissions. Due to its unique formula pricing, Curve Finance is best for exchange between various tokenized assets. It simplifies exchanges that occur in an almost similar range and reduces slippage.
  1. Uniswap has a well-deserved reputation among decentralized exchanges. At the moment, it is considered a leader in decentralized finance. Of course, it has its advantages and disadvantages, but nothing can compete with its ease of use and sufficient liquidity. This decentralized platform runs its own automated market-making protocol. The exchange is maintained by a governance model that gives holders of the UNI token voting rights. In September 2020, Uni gave away tokens in an airdrop as a sure-fire way to guarantee decentralization. All customers who had leveraged the platform to buy and sell obtained the UNI token. On the technical side of trading, this platform demands a commission of 0.3% for each token exchange.
  1. SushiSwap is a decentralized platform that handles exchanges of tokens, popular for yield farming using AMM smart contracts. Users that wish to provide liquidity to SushiSwap are compensated with a commission.
  1. Bancor is a reliable liquidity protocol that was among the first in the DeFi industry. The Bancor Network is a great platform for exchanging tokens and yield farming based on its BNT token. The distinguishing feature of this platform is that its AMM does not adhere to the 1:1 basis to ensure liquidity. Moreover, this platform has a liquidity protection feature similar to insurance coverage.
  1. Balancer is an Ethereum-based DEX and a great alternative to centralized platforms. It enables traders to buy and sell supported cryptocurrencies and add liquidity to its protocol using its pools. Like most of the latest DeFi apps, this exchange has its token, called BAL. It powers the protocol and may be obtained by providing trading and liquidity on the exchange.

Highlighting a top exchange isn’t possible, as it depends on the crypto assets that a user wishes to trade and their platform preferences; however, from this list of decentralized exchanges, there are many good choices for people looking to dive deeper into this sphere.

The Future of Trading on a Decentralized Market

DEXs are generating increased interest among crypto enthusiasts, as they offer freedom, custody of one’s own funds, and an ability to reach the unbanked or those who wish to trade currencies on better terms than centralized counterparts are offering. As the number of DEXs and corresponding users increases, high competition will force exchanges to improve their services to satisfy the needs of a wider customer base.

Platforms like Loopring and 0x see this market gap and are endeavoring to make it easier for developers to create innovative protocols for decentralized exchanges using Ethereum.

Wrapping Up

DEXs entrust all entitlements and proprietorship to the community, while everything else is performed efficiently by smart contracts. What is more, the non-custodial feature of all DEXs ensures that libertarians are able to exercise their dream of having a financial system virtually free of interference.  

Unfortunately, it is precisely this level of decentralization that limits DEXs from becoming mainstream in the near future. In the meantime, if you are looking to spend on a token that is not found anywhere else beyond DeFi, opting for a decentralized platform is the ideal solution.

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