What is the best cryptocurrency exchange
What is a decentralized cryptocurrency exchange (DEX)?
Trading cryptocurrencies has become increasingly popular in recent years, reaching $ 2 trillion in the asset class.
Given that most digital currencies, including Bitcoin and Ethereum, pride themselves on being decentralized, it's surprising that their trading ecosystems are anything but.
The vast majority of cryptocurrency trading today takes place on centralized exchanges. These platforms usually involve intermediaries, third parties and authorities that are intentionally not present in a decentralized cryptocurrency.
But not for long! Decentralized exchanges propose a future with no individual, monolithic organizations to approve or deny your trading privileges.
How does a decentralized exchange work?
Decentralized exchanges essentially use smart contracts to ensure that two parties involved in a trade meet the terms of their agreement.
As the title suggests, a smart contract is a digital, blockchain-based contract that automatically reviews and executes an agreement. As part of a decentralized exchange, a smart contract is typically used to hold trader funds in a temporary escrow account to ensure that both of them adhere to trading terms.
Smart contracts do not involve any human intervention, making them perfect for tasks that would normally generate malicious activity or fraud. By using an intelligent contract, the decentralized exchange can also work without an intermediary.
Because smart contracts are executed on a cryptocurrency network, there is virtually no downtime with decentralized exchanges. The data for each trade is also permanently recorded in the blockchain, which guarantees absolute transparency.
Now that you know a little about decentralized exchanges, these are the ways they differ from (and are superior to) centralized exchanges.
Safekeeping of assets
The most noticeable difference between decentralized and centralized exchanges is that the former don't keep your assets in custody, be it fiat or cryptocurrency. For this reason, decentralized exchanges are usually also referred to as non-custodial.
This is an important distinction as the vast majority of exchanges require you to deposit your assets with them prior to trading. In other words, you trust the exchange to protect your holdings and to keep the terms of a trade.
In the event that a centralized switch suffers a security breach, user resources are an easy target for the attacker. An exchange that sees itself compromised is also not a hypothetical or unprecedented situation.
Centralized Crypto Exchange Hacks
Dozens of exchanges have fallen victim to massive hacks and breaks in the past few years alone. Since cryptocurrency transactions are permanent in nature, an exchange can do very little to retrieve lost or stolen funds.
Perhaps the biggest hacked exchange was Mt. Gox in 2014. At the time, the exchange single-handedly accounted for 70 percent of the world's Bitcoin trades, making it the largest broker in the cryptocurrency industry.
In March 2014, the exchange filed for bankruptcy, claiming it went bankrupt after hackers infiltrated their wallets and abolished $ 460 million worth of cryptocurrency.
Since then, billions of dollars worth of bitcoin and other digital currencies have been withdrawn from various central exchanges. From Coincheck in Tokyo to Kucoin in Singapore, almost all of the major exchanges have lost millions of dollars worth of digital assets.
You keep control of your crypto with the help of a decentralized exchange
However, for the decentralized exchange, you don't have to give them control of your cryptocurrency. This means that you can continue to store your cryptocurrency in a private wallet until the trade is complete.
In addition to the security benefits mentioned above, decentralized exchanges also guarantee transparency and accountability.
While the trading and order matching processes are proprietary on most centralized exchanges, the opposite is true for most decentralized exchanges.
Uniswap, one of the most popular decentralized exchanges, is open source, which means that its code is publicly verifiable. All weaknesses found in the order matching process can be quickly identified and finally resolved by the entire cryptocurrency community.
Decentralized exchange fees
Centralized companies like Coinbase and Kraken are structured as companies with the aim of making a profit.
They do this by charging fees at almost every step of the trading process, including fiat deposits, cryptocurrency withdrawals, and buy / sell orders. While casual investors may not be aware of these fees, a 1 percent profit reduction may be important for frequent traders.
However, decentralized exchanges make it a priority to keep trading fees as close to zero as possible. For example, Uniswap proclaims that it “acts as a public good” and does not charge a platform fee.
Decentralized Exchange data protection
As with any financial institution, centralized exchanges are required by law to comply with local laws and regulations. For this reason, exchanges typically require you to submit personal and tax documents in order to sign up for an account.
The collection of this information is mandatory under Know Your Customer (KYC) and Anti-Money Laundering (AML) laws.
Fortunately, decentralized exchanges are isolated from the KYC / AML compliance requirements. A DEX can be accessed and used by anyone with an Internet connection anywhere in the world. The lack of a central authority or body means that governments have no way of forcing the decentralized exchange to take user identification measures.
Decentralized exchanges: what are the disadvantages?
In contrast to conventional exchanges, decentralized exchanges offer an unprecedented level of freedom and flexibility.
However, some factors can limit their acceptance and appeal to a wide range of users. The most important among them is the lack of liquidity on most of the major DEX platforms.
Because every trade is peer-to-peer, an exchange may not have enough users ready to trade an asset of your choice or at the price you want to trade at. With centralized platforms, this is rarely a problem as the liquidity is paid for by the owner of the exchange.
Slow trade settlement times could also be negative for decentralized exchanges in the eyes of some traders. Since the trades are peer-to-peer trades, it can easily take a few minutes for the transfers to be completed and displayed on a blockchain.
Decentralized cryptocurrency exchanges are the future
However, over time, innovations in cryptocurrency and decentralized finance are likely to alleviate these issues. By then, DEX platforms can already offer significant privacy and security benefits while being used to trade cryptocurrency.
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