When trading digital assets, like cryptocurrency, investors are required to rely on platforms called cryptocurrency exchanges.
Many may not be aware that other than Centralized Exchanges (CEX) that are offered by a firm or organization, is another variation which is becoming increasingly popular, called Decentralized Exchanges (DEX), which rely on other means of maintaining their platform.
What is a CEX?
Centralized Exchanges or CEX are cryptocurrency platforms that offer trading services and Bitkub is an example of such exchange platforms. CEX are unique in terms of how they are easily-accessed, while also being regulated. Furthermore, such exchanges are compatible with fiat currencies and administered by personnel 24/7, enabling for immediate assistance to be available for users.
However, Centralized Exchanges attain the downside of not enabling investors to access their own private keys to their crypto wallets. As a result, exchanges are considered as a mediating authority which processes transactions straight through to the blockchain network.
With such factors provided, investors are advised to take additional precautions through the selection of a trustworthy platform to secure and protect their assets from external security breaches.
What about DEXes?
A Decentralized Exchange (DEX) is a platform that facilitates cryptocurrency trades like a CEX, but differentiates in terms of how it is situated on a blockchain’s smart contract, allowing users to complete transactions without the need for a central authority.
Without a third party mediating, crypto coins are truly owned by investors, in their wallets. Essentially, completing transactions on DEXes sends the coins directly to wallets.
Types of DEXes
Decentralized Exchanges are divided into three categories:
1.On-chain order book
On-chain order books are exchanges that are decentralized, meaning they are the most transparent as every transaction order, whether its buy, sell or cancelled ones, are immutably recorded on the blockchain network. Nonetheless, with such effectiveness, this type of DEX does face the trade-off of slowness, in addition to higher fees.
2.Off-chain order book
Off-chain order books are the opposite of the previous as most transaction data is recorded off the blockchain network, making it centralized in this aspect. Nonetheless, with less transaction data on the blockchain itself, the network does function at high capacity, though not as fast as CEXes, making it not too popular in the crypto community.
3.Automated Market Maker (AMM)
Automated Market Makers or AMMs are one of the most popular variations as it does not require market makers and takers when making trades as the AMM is already the automated liquidity provider. AMMs are a set of algorithmic codings that allow users to enter a platform and trade instantly, without a market maker.
They function through smart contracts to create liquidity pools, which reward those who loan out to the pool and increase the system’s liquidity. In result, passive-income seeking investors can utilize this type of DEX to reep rewards. As a benefit, the liquidity in these DEXes are quite high, making trading easy.
Additionally, every transaction is recorded onto the blockchain network, rendering AMM DEXes capable of having a unique function, while also being transparent and decentralized, making it increasingly popular in contemporary times.
A number of users are concerned over KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures when registering on Centralized Exchanges as they may feel uncomfortable providing personal information in the case that it is leaked. The usage of Decentralized Exchanges aids this concern immensely as they only require crypto wallets.
Users’ funds are also stored within said wallet, making it free-of-worry from any security breaches on CEX, whether it’s internally or through unauthorized access of an exchange. Also, some coins and tokens can be found on DEXes before they are listed on CEXes.
Using DEXes can be more complicated than CEXes as there can be complex functions, which new users can become confused about, and the issues of safety and asset security are dependent on the user’s precautions. Therefore, investors are advised to be consistently cautious over this matter as there are always imminent risks and no platform can guarantee safety. Even filling in your private key on your personal devices can be risky.
Furthermore, the matter of gas fees on smart contracts are also a large issue as some Decentralized Exchanges have an extremely high rate of gas fees, some even higher than the amount you’re trading with! This often appears on on-chain order book DEXes.
DEXes or Decentralized Exchanges are platforms that facilitate the trade of cryptocurrencies that are not administered by a central authority, but rather functions through smart contracts, which render transactions to be paid directly by users, but still, without a third party to intervene. Nonetheless, with the given sense of privacy, comes the trade-off of security that users are coerced to individually manage, in addition to the complexities that they would face as well.
Those interested in utilizing DEXes are advised to conduct extensive research, while also being extremely cautious to prevent any loss of funds and to manage risks and damage.