What does it actually mean, how does this type of exchange work and what are its strengths and weaknesses? Find out everything you need to know in this article.
Decentralized exchange: what is it?
A decentralized exchange allowsbuy, sell or trade digital assets, in particular cryptocurrencies (Bitcoin, Ethereum …), but also NFT, staking, etc. Unlike a centralized exchange, the DEX (Decentralized Exchange) does not have an intermediary between the buyer and the seller. In other words, transactions are peer-to-peer (peer to peer). No bank or financial institution comes into play in the sale and purchase of cryptocurrencies.
Validation and verification of transactions are carried out by smart contracts Where is it smart contracts which are based on blockchain. These are programs that run automatically when previously defined conditions are met.
Decentralized exchanges, an essential cog in DeFi
Decentralized exchanges are one of the essential elements of DeFi or Decentralized Finance. In fact, thanks to these platforms, it is possible carry out financial transactions in full autonomy without going through intermediaries and without the approval of any authority.
Overall, as DEXs gain prominence on decentralized exchanges, the DeFi will increasingly establish itself within the financial system. A movement that has already started with banks and investment funds increasingly interested in cryptocurrencies and their derivatives.
How does a decentralized exchange work?
Each DEX has your native token. All users who wish to transact on a particular platform must first buy ecosystem-compatible altcoins. It will serve as a trading currency and allow the exchange to develop and finance itself over time. Some platforms also use them to pay for staking.
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Since there is no intermediary like banks, no organization will guarantee the provision of equity to the DEXs. It is the users themselves who will set up these funds, encouraging them to finance what are called “liquidity pools”.
This advantage can also turn into a disadvantage, especially when we see the recent disappointment of the Terra Luna project.
Why choose a decentralized exchange
Here are the main reasons why you should use a decentralized exchange:
- A wide variety of cryptocurrencies available ;
- Fully autonomous operation;
- Highly safe against hacking attempts ;
- Lower or even non-existent costs;
- A respect for your anonymity ;
- Full control of your cryptocurrencies.
- Problems of scalability that follow slowdown in transactions ;
- Low overall liquidity;
- Requires a crypto wallet.
Bottom line: access to the full potential of DeFi with decentralized exchanges
Finally, DEX are many but little used compared to CEX (Centralized EXchange). However, their role is expected to grow and attract more and more users. be a essential for anyone wishing to interact with DeFithe expansion of decentralized finance should mechanically benefit the main decentralized exchanges such as: Pancakeswap, Uniswap, dYdX or Balancer.