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What is DEX? Decentralized exchange explained

Samson Ononeme | Apr. 23, 2019
What is DEX? Decentralized exchange explained

April 23, 2019, | AtoZ Markets - Today, there are two types of cryptocurrency exchanges in operation, namely, centralized exchanges and decentralized exchanges. It is important that investors know and understand the difference between them before trading. What is DEX?

What is a DEX?

DEX, which is also known as a decentralized exchange,- is a marketplace for cryptocurrencies or blockchain investments that is totally open sourced. There are no middlemen at a DEX, instead, buyers and sellers deal with each other directly via peer-to-peer (P2P) trading applications. A good way to think of a DEX is as a “do-it-yourself trading solution.” You make the trades and hold the funds in your own account. 

Such a system can be established by creating proxy tokens (cryptoassets that represent a certain fiat or cryptocurrency) or assets (that can represent shares in a company for example) or via decentralized multi-signature escrow system, among other solutions. 

DEX have become popular because they are quite easy to find and use. Quite a few decentralized exchanges have attracted a lot of attention in recent years. Waves Platform and Ether Delta are two of the most popular. EtherDelta is a token exchange that exists as a Decentralized application (DApp) and utilizes the Ethereum blockchain. However, this system contrasts with the centralized model.

What is a Centralized exchange?

A centralized exchange operates as a brokerage house, in which a user deposit their funds in an account and the exchange freely makes the trades on your behalf. When a user requests a withdrawal, his funds are then converted back into the cryptocurrency they represent and transferred to their owner. 

A majority of the well-known exchanges; such as Binance, Coinbase and CEX.IO are centralized. A popular benefit to these exchanges is that they will take credit or debit card and bank transfer payments. They may also pay out in fiat currencies like dollars or Euros which many users prefer.

Pros of a decentralized exchange

What is DEX? Decentralized exchanges

A lot of traders like decentralized exchanges because they have some serious advantages. Strangely enough, these advantages are why a lot of traders distrust decentralized exchanges.

Top advantages of a decentralized exchange can include:

  • A DEX can be more resistant to hacking than a centralized exchange because account information is not shared with the exchange operator. Rather, funds might be kept in your trading account and you will be the only one with access.
  • Theoretically, governments or regulators cannot shut down a DEX because it is decentralized operating through a wide variety of nodes. 
  • DEX operates all over the cloud through a variety of nodes as there is no server which can go down or get hacked.
  • The degree of privacy is high because you are not sharing your data with the exchange operator.
  • You are in control of your funds in your own account.
  • DEX can be faster because you make the trades yourself.

Cons of a decentralized exchange

Decentralized exchanges are not designed for everybody because they are not perfect. The downside to a DEX that you should be aware of include:

  • More work is involved because you will have to handle chores normally taken care of by a centralized exchange such as making trades and transferring money.
  • The funds are not regulated or insured. Exchanges that are regulated might be required to return the funds at any time, so they keep funds in escrow for speedy withdrawals.
  • Most DEXs will not take credit or debit card or bank transfer payment.
  • Trading volume is limited and this can keep prices low and fees high.
  • The services available from decentralized exchanges are limited. Margin trading, stop losses and trades involving fiat currencies will usually not be offered.
  • No customer service you can reach out to in case there is a problem.
  • A DEX can be much more expensive than a centralized exchange because you may need to purchase Ethereum Gas (Ethereum services) every time you make a trade. This indicates that a decentralized trade can sometimes cost several times what a centralized trade would.

Who should use decentralized exchanges?

DEXs are not meant for everybody. Hence, casual investors, cryptocurrency beginners, and persons that just want to make transactions in altcoins should stay away from them.

If you do not trade ICO tokens or buying large amounts of digital currencies there is little or no advantage to using a DEX. In the same vein, people who prefer margin trading, or currency trading would probably be better served by a centralized exchange like CEX.IO or Kraken. Contrarily, a person that needs to buy a large amount of cryptocurrency for a specific purpose might be better served with a DEX.

Anybody that uses decentralized exchanges should definitely have another method of cryptocurrency storage such as a hardware wallet or another digital wallet. It is worthy of note that DEX is not based as a storage solution but as a trading mechanism.

Every investor needs to understand the difference between a DEX and a centralized exchange. Having knowledge of how both solutions work can making trading easier and save you money.

Think we missed something? Let us know in the comments section below.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.