Are you tired of using centralized exchange platforms? Now, there may be an alternative you may want to try out: decentralized cryptocurrency exchanges.
Decentralized exchanges (DEXs) are making waves in the crypto world lately. What are these exchanges? How do they differ from typical centralized platforms and who are the people best suited to use DEXs? You’ll find all the answers here:
What is a Decentralized Exchange?
Crypto enthusiasts and traders look for security, safety, and anonymity in their trades and transactions. However, they tend to utilize centralized exchanges which are vulnerable to hacks and other malignant practices such as theft.
Enter the decentralized exchange!
A decentralized exchange is a cryptocurrency platform that operates without a central authority. Such platforms give crypto holders a convenient, safe, and secure way to make transactions with their coins on a peer-to-peer basis. They also offer added layers of anonymity when making transactions.
Here are some of the characteristics of a decentralized exchange:
- Uses automated processes to complete direct peer-to-peer transactions
- Does not rely on third-party services for holding their clients’ funds
- Customers don’t need to undergo a Know Your Customer (KYC) process
- Offers more security and anonymity than a centralized platform
Decentralized exchanges are built on a permissionless ecosystem. This means that DEX customers have full control of their funds at all times. No entity controls or permits them to transact using their cryptocurrencies. Customers are solely responsible for their fund safety, security, and movement.
How Do Decentralized Exchanges Work?
Automation is at the heart of decentralized exchanges. There are two main automation processes used by DEX’s:
- Utilizing proxy tokens, which are virtual assets representing a cryptocurrency or a particular fiat
- Applying a decentralized multi-signature escrow procedure
Both processes allow individual wallets to directly transact with each other, without the need for a middleman.
In terms of architecture, decentralized exchanges do not have a centrally-controlled server. Additionally, the network nodes are distributed, making it harder to hack or shut down DEX’s.
Centralized vs Decentralized Exchanges
The biggest difference between the two kinds of crypto exchanges is the presence of middlemen in centralized platforms and their absence from the decentralized exchanges.
Companies act as middlemen who control and earn revenues from transactions made in a centralized exchange. Meanwhile, decentralized exchanges rely on smart contracts and use a blockchain that relies on a peer-to-peer protocol to run.
Centralized exchanges offer near-instant transaction speeds for their traders. However, this isn’t the case for DEXs. A decentralized platform’s transaction speed takes a bit more time. This is all thanks to the speed at which independent nodes and internodes reach a consensus depending on the transaction verification rules of the exchange platform.
Safety and Anonymity
Since decentralized platforms don’t require KYC processes, transactions are made more secure and anonymous. This is in contrast with a centralized exchange, where customers need to submit documents required for a KYC process (similar to banks).
Traders using a decentralized exchange keep their private keys to their respective digital coin wallets. This ensures that hackers cannot gain access to the platform. DEX’s pass the burden of security to their customers who hold their respective private keys.
Conversely, centralized platforms keep their customers’ private keys. Hence, hackers can quickly attack a centralized platform, steal company-kept private keys, and take as many coins from the exchange’s customers.
Who Should Use Decentralized Exchanges?
Decentralized exchanges are great for people who:
- Need to maintain anonymity
- Are concerned about losing their crypto investments to hackers
- Have large crypto investment amounts
- Want to pay lower trading fees
- Need to quickly gain access to their assets for easier management
Decentralized exchanges are gaining popularity nowadays. It’s a safe and secure way to trade, invest, and transact with cryptocurrencies. DEXs are advisable for crypto enthusiasts who highly value privacy, anonymity, and high levels of security over their cryptocurrencies.
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