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Decentralized Exchanges Vs Centralized Exchanges
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How does a decentralized exchange work?

On-chain order books

Off-chain order books

Automated Market Makers

Advantages and disadvantages of the decentralized exchange (DEX)

Advantages of Decentralized Exchange (DEX)

  • You do not need to provide any personal data to use a decentralized crypto exchange. There is no registration and verification system. Anonymity is one of the main advantages for those who trade cryptocurrencies. That is, DEX users have their own private keys and are responsible for managing the security of their assets.
  • Your funds are stored in your crypto wallet, and not on the exchange platform. DEX creators will not be able to take your funds in any way as they do not have access to them.
  • Even the best and most reliable centralized exchanges can fall victim to hackers or experience technical issues. This never happens on a DEX platform where each user keeps their private keys.
  • Another advantage of decentralized exchanges is their absence of control or censorship by governments. The absence of a specific executive team to which sanctions or requirements can be applied prevents the authorities from controlling the transactions carried out on the platform, stopping the operations and freezing the funds.
  • Greater privacy and anonymity. The decentralized nature of DEXs means that they do not typically implement Know Your Customer (KYC) controls, providing users with the ability to trade cryptocurrencies without revealing any personal information to a centralized exchange platform.
  • Wide range of small-cap altcoins. Some decentralized exchanges offer a larger range of altcoins and smaller cryptocurrency projects that may not be listed on major international cryptocurrency exchanges. However, these coins are subject to less scrutiny or regulation, meaning they can be riskier investments.

Disadvantages of Decentralized Exchanges (DEX)

  • Difficulty using them. First of all, it is about the lack of many useful trading tools. For example, there are no stop losses, linked orders and trailing stop orders.
  • They provide pairs of crypto assets within the chosen blockchain. If you have chosen Ethereum, you will only be able to trade assets that exist on this network. Therefore, it will not be possible to exchange Ethereum for Bitcoin as they are on different blockchains.
  • The operation of these services is more complicated than that of their centralized competitors.
  • Sometimes there is little liquidity on DEX trades, especially with the less popular pairs. Some decentralized exchanges have liquidity issues: the liquidity available on a DEX is determined by the number of active traders and the trading volume on the DEX. Therefore, it can be quite difficult to find someone who is willing to buy or sell an asset at a reasonable price.
  • There can be large commissions when taking any action on the Ethereum network.
  • Order speed may be affected by network congestion. Decentralized exchanges are limited by the speed and scalability of the blockchain network they operate on. Trades executed on a DEX that operates via smart contracts must be confirmed by miners before being processed. Periods of congestion on the network on which a DEX operates can cause “price slippage”, in which a trade is not executed due to price movement in the assets traded during the time period of the trade.
  • Exposure to risky investments. Decentralized exchanges are for the most part unregulated and in most cases do not investigate token listings. Anyone can create a new token on many DEXs and offer liquidity and trading pairs. Although some decentralized exchanges now incorporate smart contract auditing into the listing process, less DEX-savvy users expose themselves to additional risk when investing in unverified crypto assets.

 

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