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 crypto-currencies (Bitcoin, Ethereum…), but also NFTs, 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 made on a pair-to-pair basis (equals). 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 we smart contracts which are blockchain-based. These are programs that run automatically when previously defined conditions are met.
Decentralized exchanges, an essential cog in DeFi
Decentralized exchanges represent one of the essential elements of DeFi or Decentralized Finance. Indeed, thanks to these platforms, it is possible to make financial transactions fully autonomous without going through an intermediary and without the approval of any authority whatsoever.
Overall, as DEXs gain prominence over decentralized exchanges, the DeFi will increasingly settle within the financial system. One that has already been repaid with banks and investment funds that are increasingly interested in cryptocurrencies and their derivatives.
How does a decentralized exchange work?
Each DEX has its own native token. All platform users wishing to carry out transactions on data above all buy the altcoin(s) compatible with the ecosystem. It will serve as a currency of exchange and allow the exchange to develop and finance itself over time. Some platforms also use them to remunerate staking.
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Since there is no middleman like banks, no organization will ensure the supply of equity to the DEXs. It is the users themselves who will constitute these funds by 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 ;
- Completely autonomous operation;
- Highly secure against hacking attempts ;
- Minimal, if any, fees;
- UN respect for your anonymity ;
- Full control of your cryptocurrencies.
- Scalability issues resulting in slowdown in transactions ;
- Overall low liquidity;
- Requires a crypto wallet.
Conclusion: Accessing the Full Potential of DeFi with Decentralized Exchanges
To conclude, DEXs are many but little used compared to CEX (centralized exchange). However, their role should grow and attract more and more users. being a essential element to possibly wish to interact with DeFithe expansion of decentralized finance should mechanically benefit the main decentralized exchanges such as: Pancakeswap, Uniswap, dYdX or Balancer.