Meet Decentralized Exchanges
Blockchain technology was created to be a community-oriented and open-source resource where users of the decentralized network have the authority instead of a central entity. But despite cryptocurrency being fueled by blockchain technology, most platforms used by crypto users to trade their coins are still managed in a centralized way by third parties.
Until recently, centralized cryptocurrency exchange has been the norm. However, things are rapidly changing thanks to decentralized exchanges.
Decentralized exchanges (DEX) was introduced to solve the problems that centralized exchanges face. DEX aims to provide a peer-to-peer marketplace without the need for a third-party company to mediate trades for users. DEX also allows users to take full ownership of their funds. Unless you’ve been living in a hole, it’s clear that this new breed of crypto exchange is slowly taking over the world.
According to a recent report by Dune Analytics, the total trading volume of decentralized exchanges reached a record high in August 2020 after climbing up 160% from July. Overall, the combined trading of all DEXes has reached USD 11.6 billion coming from USD 4.5 billion the previous month. Trading volume has been continually growing since May 2020, an indication that mainstream adoption is on its way.
But even with all of its apparent benefits and recent traction, more users are still using centralized exchanges. If you are one, it’s time to make the switch.
The issue with centralized exchange
Centralized exchanges such as Coinbase are the exact opposite of decentralized ones. Instead of peer-to-peer transactions, trades are made through a centralized platform. They are managed by profit-oriented companies that earn revenue from the platform’s fee structure. Simply put, gaining access and using these platforms will require fees, all of which go to the centralized exchanges. This defeats the supposed community orientation of blockchain technology.
In January 2018, a major cryptocurrency exchange, Kraken, went down for what was initially said to be two to three hours of system maintenance. This wasn’t what ended up happening, and the supposed maintenance went on for 40 hours.
The fact that Kraken became unusable for such a long period is what is troublesome. When you’re a platform that manages everyone’s funds, accessibility issues like this can be disastrous. Cryptocurrencies are highly volatile; a 40-hour downtime can translate to losing a lot of money in terms of opportunity costs. This is just one of the reasons why decentralization is needed.
Moreover, when you trade with centralized exchanges, private keys remain with the platform. You won’t get access to these keys, meaning you never get full control and ownership of your coins. This also means that if the exchange is breached, all your funds are as good as gone.
Why choose decentralized exchanges?
Decentralized exchanges are not controlled by any company. While the server is still centralized, the exchange itself is not. Users of these platforms have complete control over their funds. When trading, they don’t need to send their private keys or funds to the exchange. Transactions are made using smart contracts, not through intermediaries.
Unlike centralized exchanges that ask users to submit identification, DEX does not come with KYC requirements. If you absolutely hate the lengthy and tedious registration processes that usually happen in centralized exchange platforms, then DEX is definitely a breath of fresh air. It also helps quell worries over compromising personal information when registering.
Centralized exchanges often ask for financial information as well. This is because trades on these exchanges often involve fiat currency. With decentralized exchanges, there is no risk of banking information theft.
Lastly, since DEX isn’t controlled by one entity, some decentralized exchange platforms allow their users to govern and control the platform itself. One example is KeyKey, a community-owned DEX that is currently rewarding its early supporters with a governance token called LOCK. If being in control of the core crypto tools that you depend on is important to you, then you should definitely take advantage of opportunities like this.
Now, it may seem like using decentralized exchanges is a walk in the park. However, users should be aware that at the moment, many DEX platforms are not as beginner-friendly.
If you’re a cryptocurrency neophyte, DEX can be overwhelming. Contrast this to Coinbase and other centralized exchanges that have very simple and easy-to-understand interfaces. Still, considering all the benefits you get from DEX, investing time to learn more about it should pay off in the long run.
Conclusion
DEX is still at its early stages. It has a long way to go before it can completely dominate the crypto trading market. But with its potential, we can expect to see more of it in the immediate future.
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