Decentralized Exchanges: What Are They?
As a cryptocurrency enthusiasts or trader, you may have used popular exchanges like Coinbase, Binance, Poloniex, and Bittrex, amongst others. The challenge with these exchanges is that they are centralized and at such manage the private keys of users. If you have ever had an issue requiring you to contact customer support, then you’d agree that it can go from a long wait, to absolutely no response. The point is that users are somewhat at the mercy of these centralized exchanges.
It may also interest you to know that over $1 billion has been stolen in cryptocurrencies from centralized exchanges since 2017; from Mt. Gox to the more recent case of Coincheck. And if we are to face the facts, these problems are not going to get solved anytime soon. Rather, hackers will continually look for loopholes to exploit as blockchain tech evolves in terms of software and hardware.
Considering all the limitations that have been mentioned above, decentralized exchanges, otherwise known as DEXs appear to be the new innovation that will give current exchanges a run for their money. DEXs facilitate cryptocurrency trading on a distributed ledger; void of central control, third-party escrow intermediary, and single points of failure.
Difference Between Centralized and Decentralized Exchanges
If you have used any of the centralized exchanges listed above, then chances are that you are already familiar with how they operate and the restrictions associated with using these exchanges. Now, let’s have a look at how they differ from decentralized exchanges.
Control of Funds
In order to perform transactions on centralized exchanges, you will need to make a deposit. While this is not a problem, these funds are controlled by the centralized exchanged service. Things like the order-books and custody, are in their hands. On the contrary, on DEX platforms, users transact directly with other users, without the need of a central server. Funds are controlled by users and participants on the decentralized platform.
Crypto exchanges now require users to fill KYC forms because of stricter government regulations. With reference to what bitcoin and cryptocurrencies were praised for (anonymity), it apparent that your details and information as a trader are no longer safe. It is difficult, if not impossible at the moment to trade anonymously on centralized exchanges.
Decentralized exchanges on the other hand are all about anonymity. There can be looked as like distributed blockchain versions of centralized exchanges.
Recently I had to dump one of my old accounts with a popular crypto exchange because of verification. I tried to get verified for days and it just wasn’t happening. And I believe many entrants into the crypto space have experience this.
Users of centralized exchanges have to rely on customer support to verify their accounts, as well as authenticate and authorize transactions. This is actually a good thing, because these platforms deal with the issue of trust which may rise in person-to-person transactions.
DEXs however do not rely on third-part intermediary. The system is built on a trust-less authentication and authorization of transactions, through the use of smart contracts.