What is DEX
DEX (Decentralized Exchange) is known for trying to offer alternatives to centralized exchanges by conducting transactions as a decentralized exchange. DEX (Decentralized Exchange) is also described as a peer-to-peer marketplace that connects cryptocurrency buyers and sellers.
Unlike centralized exchanges, decentralized platforms are not kept under surveillance, in other words, the user remains under the control of his/her own private keys while trading on the DEX platform. In the absence of a central authority, DEXs use smart contracts that are self-executing under certain conditions and record each transaction on the blockchain. Safeguarding these transactions represents an accelerating segment of the digital asset market and is leading to new financial products.
Traditional stock and price exchanges combine buyers and sellers in one place, allowing investors to easily enter and exit positions at certain points, providing liquidity to the market. Higher liquidity increases the likelihood of people wanting to transact with the buyer or seller on the other side of the trade taking place. Cryptocurrency exchanges, also known as Centralized Exchanges, facilitate the trading of blockchain-based digital assets while their platforms can be centralized or decentralized. Centralized exchanges function as trusted intermediaries in transactions, often acting as custodians who can store and protect private keys and, by extension, funds.
In numerous exchanges managed by central entities, it is required to deposit fiat currency or cryptocurrency into a crypto wallet held by the exchange prior to engaging in trading activities. Additionally, it is possible to convert cryptocurrency into fiat currency and withdraw funds from bank accounts. These exchanges have emerged as an alternative to CEX platforms that offer entry into the industry. Currently, there are over 35 options for decentralized exchanges. As of October 2020, the monthly transaction volume on decentralized exchanges amounted to $20 billion. Unlike using a broker for transaction clearing, DEXs utilize self-executing smart contracts. DEXs operate in a non-custodial manner, allowing individuals to retain control of their private keys and cryptocurrency funds. DEXs do not have counterparty risk or credit liability risk, and they do not adhere to "Know Your Customer" or Anti-Money Laundering protocols.
How Does Decentralized Crypto Exchange
Work?
On a traditional cryptocurrency exchange, you start your transactions by creating an account and providing KYC to the site. After depositing funds or connecting your existing crypto wallet, you can buy, sell and exchange cryptocurrencies , make an instant transaction or build a long-term portfolio.
In a decentralized crypto exchange, you connect your cryptocurrency wallet to the software running on the website. If you want to buy or exchange crypto assets, just specify what you are looking for. The decentralized exchange application tells you the price, and if you confirm, you complete the transaction. You never sign in, provide a name or email address, or create an account.
Decentralized crypto exchanges do not match you with an individual seller. Instead, they use automated market makers to offer you coins and tokens from a liquidity pool, an amount of cryptocurrency that other users make available for a certain period of time. When you buy crypto on a decentralized exchange, you are purchasing from a liquidity pool.
The AMM approach means you can participate in their liquidity pool by lending to them. You can make your cryptocurrencies available for a week, a month or any other specified period. At the end of the period, you get your funds back and some of the transaction fees generated by the liquidity pool. This is similar to buying government bonds.
Sophisticated DEXs give you a lot of control over how you participate in the liquidity pool. For example, you can make tokens available only within a certain price range. Sophisticated investors adjust these options to increase their profits.
How to Use Dex Stock Exchange?
To trade on a decentralized cryptocurrency exchange, the user must first have a cryptocurrency wallet such as Metamask or similar. With this wallet, users can connect to decentralized exchanges and perform buying, selling and swap transactions. Metamask is a digital wallet and browser plugin used on Ethereum and other networks. Metamask allows users to interact and store tokens on blockchain networks such as Ethereum, Polygon, Avalanche. In the last part of the article, you can get information about reliable decentralized exchange recommendations and the use of Metamask.
Another advantage of a decentralized cryptocurrency exchange is that transaction fees are low. On centralized exchanges, transaction fees may be higher because centralized exchanges charge transaction fees. However, on a decentralized exchange, transaction fees are charged only by miners who verify the transaction. This results in lower transaction fees. The popularity of decentralized exchanges (DEX) has been increasing in recent years. This is due to security vulnerabilities in centralized exchanges, concerns about users' privacy, and other factors. A decentralized exchange offers users more freedom, higher security and lower transaction fees. However, like any type of investment, a decentralized cryptocurrency exchange is risky and it is important for users to research carefully and understand the risks before investing.
Advantages of DEXs
Even in the early stages of developing decentralized crypto exchanges, they offer advantages that impact digital asset custody, diversification, transaction security, trading fees, and investor privacy.
Storage
- DEXs have no custody feature, meaning that sellers do not need to give up control of private keys to make transactions. Instead, externally held wallets interact with DEXs and conduct self-transactions through smart contracts. Centralized exchanges, on the other hand, undertake to play a protective role for funds by controlling private keys. This situation creates the necessity for people to give up private key control. With such a requirement, centralized exchanges offer assurance and protection.
Variation
- As of October 2020, over 7,400 cryptocurrencies exist in the market. CEXs exercise control over the cryptocurrencies they will list, generally listing only those with sufficient trading activity, prevalence, and effective security standards to ensure profitability and regulatory compliance. Many altcoins can only be accessed by individuals through DEXs, where peer-to-peer transactions can occur without high transaction volumes. Thanks to this access, a wider opportunity is provided for participation in digital assets and an increase in financial participation is observed.
Unsafe Transactions
- In CEXs, every transaction is audited and recorded by a central authority, the exchange. DEXs, on the other hand, enable reliable transactions by executing transactions through smart contracts and recording them on the blockchain. Since DEXs do not hold individuals' funds, they are less likely to be targeted by hackers.
Lower Fees
- Decentralized exchanges operate through the use of self-executing smart contracts. DEXs use the same “gas” fee structure as the Ethereum blockchain on which they are built. DEXs charge a low fee of approximately 0.3% for exchanges. Although these fees fluctuate depending on network usage, they are much lower than the costs incurred in centralized alternatives.
Security
- Individuals who make buying and selling transactions using decentralized exchanges do not need to disclose their private keys. This is because the wallets are held externally and the DEX is not responsible for the funds. Additionally, for this reason, individuals generally do not need to complete KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures when using DEXs. Although this is advantageous in terms of convenience, it can potentially create problems from a legal perspective.
Disadvantages of DEXs
The disadvantages arising from the use of decentralized exchanges also pose obstacles to this exchange due to its widespread adoption. These shortcomings also affect the DEX's scalability, user experience, market liquidity and mobility of capital.
Scalability
- Blockchain scalability depends on the number of transactions the network can process before reaching capacity. For example, the Bitcoin network processes 4.6 transactions per second (TPS), while Ethereum reaches 15 transactions per second (TPS). Decentralized exchanges operate using smart contracts that live on blockchain networks. Therefore, DEXs are subject to the limits of their underlying network infrastructure.
User experience
- DEXs are currently in their early stages of development and can be difficult to use for individuals less familiar with decentralized blockchain technology. First, users need to be familiar with external wallet platforms before they can interact with a DEX. Then, they need to fund their wallet by transferring fiat or cryptocurrency. Finally, they need to connect this wallet to the DEX interface to perform trading. The deposit process for trading on the DEX platform is noticeably simpler than on the CEX platform.
Liquidity
- Because DEXs are still new in many respects and support a variety of trading partners, market separation has a negative impact on market liquidity. However, asset liquidity is increasing significantly with the growth of DeFi (Decentralized Finance).
Open and Closed Ramps
- Current DEX technology does not facilitate the purchase of digital assets with fiat currency such as US Dollars. In other words, there is no fiat buying or selling transaction or money transfer to the bank account. While stablecoin technology is emerging to replicate the role of fiat money in the DeFi (Decentralized Finance) ecosystem, the lack of fiat on- and off-ramps poses a barrier to entry for new users.
Popular Decentralized Exchanges
Uniswap
Pros
- Offers over 400 tokens
- It is a large, reputable and established trading platform
- High transaction volume
- Managed by DAO
- Users can earn passive income through staking
OKX DEX
Pros
- high security
- There is no storage service
- Very good rates
- Order matching via auction call mechanism
- User-friendly design
- Decentralized governance
- Unapproved listing
ApeX Pro
Pros
- High performance
- Security and privacy
- low wages
- high leverage
- Order book model
Curve
Pros
- Offers over 45 tokens
- Transaction fees are around 0.04%
- Token holders can vote on important decisions
KyberSwap
Pros
- Supports over 1,500 tokens
- Thousands of trading pairs available
- Liquidity providers charge 0.3%
- Offers staking, farming and dApp solutions
dYdX
Pros
- user friendly
- Second highest trading volume among DEXs
- It has a mobile application
- Transaction fee is only 0.1%
- Offers leveraged trading
- Allows you to earn passive income in various ways
DEX is like this. Essentially, they are intermediary services that connect crypto buyers to pools of crypto funds available for purchase.
DEXs are a step forward in the evolution of the world's digital economy. In the long run, its weaknesses will be addressed and its benefits will be matched by traditional swaps. Hybrid exchanges are already emerging that aim to offer the best of both worlds.
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