In the finance and cryptocurrency space, many of the exchanges that allow users to buy and sell coins are currently centralized. Centralized exchanges keep their systems off-chain. This means they operate as collateral for their clients and transactions that happen within the exchange are not recorded on the blockchain. This may lead to massive security breaches and unsafe storage of funds, information, and private keys.
Cryptocurrencies have expanded globally on a massive scale. And although security systems have been designed to protect users and exchanges have grown more sophisticated, hacks have continued to occur. Just recently, one of the most prominent digital asset exchanges in Asia, KuCoin, has been hacked and lost over US$150 million worth of digital assets in a security breach.
This calls for a more advanced and secure way of trading digital assets. Thankfully, a decentralized exchange (DEX) has been gaining increased momentum in 2020.
What are decentralized exchanges?
Simply put, DEX is a cryptocurrency exchange that operates in a decentralized manner. It is essentially a newer type of trading that allows users to place orders and exchange digital currencies without the need for a third-party institution to control user funds or manage the ledger. Since a centralized authority does not control it, the trades happening on these platforms are peer-to-peer exchanges.
With decentralized exchanges, users don’t need to transfer their funds to the exchange. Because of this, these exchanges can effectively cut down the risks of hacking or security breaches.
Furthermore, issues regarding the manipulation of prices and false trading volume can be prevented, providing users with real and updated currency values. These exchanges are also anonymous compared to centralized ones, so users can expect to skip the hassles of the typical Know-Your-Customer (KYC) process.
Unlike centralized exchanges where users visit a website that provides a central meeting place for buyers and sellers, DEX cuts down intermediaries. It directly connects buyers and sellers for fast and efficient trading.
How decentralized exchange (DEX) is shifting the paradigm of trading?
Decentralized exchanges work the same way as centralized ones, but without the involvement of a central authority. When done right, DEX platforms provide speed, pair variety, and user-friendly interfaces. With continual improvements and innovation, DEX will have a lot more to offer than just security and anonymity.
As Bitcoin and other cryptocurrencies gain more popularity in terms of mainstream adoption, more and more people, especially from the traditional finance sector, are taking an interest in this asset. For them, trading digital currencies can seem questionable and complicated, especially if done through a centralized entity. Decentralized exchanges can help skeptical investors be more at peace by providing a peer-to-peer marketplace.
Centralized exchanges do not provide users with complete control over their funds. This can inflict many constraints and even financial losses on investors. Through the non-custodial nature of decentralized exchange (DEX), users can now take full control of their funds. No central entities can freeze their assets or restrict user access. If the exchange experiences a security breach, users’ funds will theoretically be unaffected and users will retain possession of their assets.
As mentioned above, you also do not need to undergo tedious processes to open an account on a decentralized exchange. There is no need for users to provide their private information to third-party companies. Decentralized exchanges do not require registration for you to use the platform. A wallet address is enough to initiate the trade.
With DEX, trading from anywhere in the world can also happen without any restrictions. Users are able to quickly transfer funds without the fear of getting shut down by a centralized authority. Investors can invest as much as they want, and the peer-to-peer transaction costs allow for much lower fees than those from traditional centralized exchanges.
When it comes to centralized exchanges, there is always a sense of paranoia among users. Although they are mainly looked at as convenient and functional, they are not the most secure platform in the world. Users often worry about losing their assets to hackers and thieves. With decentralized exchanges, users can experience safe and secure trading. Its promising features such as its non-custodial nature can potentially solve the different problems users face in centralized exchanges.
If you’ve been paying attention to the evolution of the world’s financial landscape, it’s easy to see that decentralized exchange (DEX) is on track to grow even more in 2020. And frankly, we can’t wait to see what else the year has in store for us.