Decentralised exchanges are one of the most talked about topics in the Cryptocurrency space at the moment.
In this blog, we will take a look at the pros and cons of using a decentralised exchange.
Before that, let us understand the concept of a decentralised exchange and how it’s different from the traditional centralised system of exchange.
What Is A Decentralised Exchange?
A Decentralised exchange is a platform in which users can trade digital assets directly with one another without a third party involved. In the Bitcoin network, for example, users make their transactions directly through a peer-to-peer network.
The Decentralised exchange (DEX) system permits the trustless exchange of blockchain-based tokens, digital assets or Cryptocurrencies. In this system, the exchange does not rely on a third-party service to hold the customer’s funds.
Rather, trades occur directly between users through an automated process. A prime example of the same is the bitcoin loophole. Here, the trading procedure happens automatically. But, if you want, you can also trade manually in this app by activating the right feature.
Let us get into further details and understand some important factors related to DEX.
Differences Between Centralised And Decentralised Exchanges
Centralised electronic exchange systems (or “trade orders”) work by assigning buy and sell orders. The person who makes the first buy order becomes the “maker.”
This means they are responsible for buying the product at the set price if they’re lucky enough to find a corresponding seller at the same price.
The main difference between the two exchange systems lies here. Decentralised is a kind of exchange where there is no middleman in the transaction.
Following are some points highlighting the difference between the two:
- Centralised exchanges store your account information, passwords and all your funds on their servers, unlike a Decentralised system.
- In centralised exchanges, you cannot be sure if your accounts will be safe. However, Decentralised exchanges are safer and more secure.
- A Decentralised system is cheaper and more transparent, making it impossible to tamper with transactions.
Advantages and Disadvantages Of Decentralised Exchange
When it comes to Decentralised exchange, we know it’s a new and highly technical system. Therefore, it takes time for the general population to understand the pros and cons of this buzzing blockchain and Crypto world.
Here we will help you understand some of the advantages and disadvantages of DEX—
Without the middleman, the transaction fees are very low in a Decentralised exchange system. You can easily cross great distances without limitations.
Decentralised exchanges work on the blockchain. You can simply deposit the currency you wish to trade and select the currency you wish to receive.
The fact that the database is Decentralised means it is not held in one central system. That means that the data is not all stored in one place. This is an important security feature.
A hacker would have to break into millions of computers if they wanted to steal your information.
In the centralised system, all transactions are recorded on a single ledger. So, one can always track the transactions that a user is making. However, as we already discussed, a decentralised system prohibits this with its shared ledger system.
With a DEX system, you can skip paying middlemen, contractors and other intermediaries. It has brought the concept of self-executing smart contracts and functions in a gas-free structure bringing down the cost of exchanges.
Low liquidity is one of the reasons why a centralised system is often preferred over a decentralised one. The latter does not give you the option to choose instruments, pair currencies or order types.
The DEX system is still new and complicated for most people around the globe. In fact, it’s not yet legal in most countries.
Additionally, it is important to remember decentralised exchange is still in its developing phase. Therefore, we need to wait patiently for this system to overcome certain hurdles before making it a standard procedure for exchange.
Inability To Recover
There is no KYC system when it comes to decentralised exchange. Also, you don’t get to cancel a transaction once initiated.
You don’t have to go to any authority to report when you face a compromised situation within your account.
Decentralised exchanges are still in their infancy. With many of them suffering from UX problems or lacking basic trading features, it is slowly developing.
However, decentralised exchanges are not just for trading Cryptocurrencies; you can also use them for other assets.
They are still a relatively new concept, and a lot of work needs to be done on them. The future of decentralised exchanges is bright as we wait hopefully for better, more secure and cost-free platforms.