Exchanges are always a controversial topic in the crypto space. It is not safe to put your funds on exchanges because exchanges can be hacked and users will lose all his funds. One of the biggest events in Crypto history is the Crackdown of Mt. Gox. More than 800,000 Bitcoin was stored in the Mt. Gox. wallets and the CEO of Mt. Gox claim that all the funds are hacked because of some bugs in the wallet.
The main question is how to trade on exchanges with full control over funds? The answer to this question is Decentralized Exchange (DEx).
1 What is DEx (Decentralized Exchange)?
A decentralized exchange (DEx) is a peer-to-peer platform that allows users to direct conversion of cryptocurrencies.
Decentralized exchanges are developed to solve the core problems that occur in centralized exchanges. Decentralized exchange creates a peer-to-peer market using the blockchain technology which allows users to transact and store funds securely. There are no third parties involved in the transactions
Decentralized platforms provide the security of funds using the distributed ledger technology (DLT) also known as Blockchain. Mostly the following Blockchains are utilized for the development of DEx: Ethereum (EtherDelta, IDEX), Waves (Waves DEx), Binance coin (Binance DEx) and other cryptocurrencies.
2 Decentralized Exchanges V.s Centralized Exchanges
Centralized exchanges are managed and controlled by a specific group of persons (management team) focused on making personal profits. Centralized exchanges store the user’s data and funds on their wallets. The responsibility to safeguard users funds is of the exchange management team. The team fully controls the platform actions and trading (can easily manipulate the trading orders and history) and make decisions independently for the development of the platform.
On the other hand, Decentralized exchanges are managed automatically or semi-automatically by smart contracts developed on the Blockchain. The funds are stored on the user’s private keys generated on the user’s side. A decentralized exchange does not store any trading data or private keys on its servers, it just provides a platform to match peer-to-peer trading orders.
|Centralized Exchange||Decentralized Exchange|
|More User-friendly Interface||Less User-friendly Interface|
|High Trading Volumes||Low Trading Volume|
|Good Customer Support||Few Customer Support|
|Fast Transactions||Slow Transactions|
|Less Control Over Funds||Full Control Over Funds|
|High Hacking Risks||Low Hacking Risks|
3 Advantages of Decentralized Exchanges
Decentralized exchanges do not store user funds. Users have full control over the stored funds and have access to the private keys. Hence the risks of hacking and collapse of exchange are minimal. All the private keys are stored on users computers so if a hacker gains access to the exchange servers, he never gets the user funds. Phishing attacks may be used to steal users information and private keys to withdrawal the funds. Every time you open an exchange website double check the URL.
Decentralized exchanges are hard to manipulate because there is no central authority that controls the exchange platform. Price manipulation by fake orders and fake trade volumes cannot be achieved on a decentralization platform.
As mentioned above the user data and private keys are not stored on the exchange server, so the privacy of the users remains safe. There is no need for document verification (KYC) or an email to start trading on a decentralized exchange so the user data cannot be stolen. The user’s data is stored on the Blockchain more anonymous than any centralized system.
Decentralized exchanges are powered by the Distributed Ledger technology (DLT) known as Blockchain so they are not interrupted by local or international regulations authorities. Centralized exchanges can be easily blocked completely or partially to provide users with the services in a certain location or country. The decentralized platform opens doors for a new startup to provide liquidity to their tokens.
4 Disadvantages of Decentralized Exchanges
Hard to Restore Accounts
As mentioned above decentralized exchanges does not need any verification and funds are stored on the private keys, if any user lost his private key or passwords he is unable to recover the funds. So users must keep multiple copies of private keys on a secure medium.
Decentralized exchanges generally have very low trading volume as compared to the centralized exchanges. The daily trading volume at
The difference is mainly caused by the tools and services provided by centralised exchanges. Traders prefer centralized platform because of better trading tools and good customer care service.
The decentralized exchanges are run on Distributed Ledger Technology (DLT) and transactions settle by smart contracts. So generally there is no support centre that will solve or help the users problems.
If a user accidentally makes a wrong transaction or lost the private keys and passwords then there is no-one who can assist the user. There are a few support representatives so when the number of requests increases each user have to wait for a long time.
As mentioned above decentralized exchanges are run on the Blockchain so the transactions speed depends on the network load and miners. The fee also varies with the network load and you may need to pay a higher fee to confirm your transactions fastly. On the other hand, centralized exchanges transactions speed is very high because transactions settle on the central server.
5 How to Start Trading on Decentralized Exchanges?
If you are a regular trader than starting on a decentralized exchange will be a bit easy than noobies. Decentralized exchanges are more complicated than centralized exchanges, users need to generate private keys and password to access the platform. Users need technical knowledge to start with a decentralized platform.
As mentioned above the decentralized exchanges are based on Blockchain (Ethereum, Binance chain etc.), so to complete the transaction, fees will be paid. Users must have knowledge about the minimum network fee that is needed to confirm the transaction.
Trading is also different from a centralized platform. Trading order will be matched with some other user orders to fill and the transaction takes place on Blockchain. All transactions are signed by the user’s private keys and time-stamped on Blockchain.
6 Can Exchange be Fully Decentralized?
Most of the existing decentralized exchanges are not fully decentralized. Most of the exchanges stores trading data on their server but private keys remain on the user’s end.
This will lead the interruption from the central regulation bodies to change or block the platform in certain geographical areas. An example of that is the IDEX decentralized platform which is prohibited by the New York government to provide services for New York’s users.
7 Final Thoughts
Decentralized exchanges are very useful where the centralized exchanges are banned or not able to deliver services due to regulation problems.
A decentralized exchange is just not a website that the government or any regulatory body can ban or stop, Decentralized exchange is powered by Blockchain that is invincible.
There are still some disadvantages of decentralized exchanges like low volumes and less trading tools but these can be easily solved by the development and adoption of cryptocurrencies.