What are Decentralized Crypto Exchanges?

By Prashant Jha

A while ago, we told you about the top 5 decentralized cryptocurrency exchanges in the market and briefly discussed their growing relevance in today’s crypto scene. However, we have not really delved into the topic in much detail. In fact, we are yet to answer the question: “what are decentralized cryptocurrency exchanges?”, which is why today we decided to take it up for a lucid explanation.

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We will first have a quick look at what decentralized cryptocurrency exchanges really are and then move forward to analyze their pros and cons. While the crypto market today is accustomed to more of centralized crypto exchanges such as Binance, Gemini and Kraken, many crypto enthusiasts today are turning towards decentralized crypto exchanges.

What Are Decentralized Crypto Exchanges?

A decentralized cryptocurrency exchange, frequently referred to as DEX, is a peer-to-peer platform for buying and selling of cryptocurrencies without involving any central authority.

Unlike more commonplace centralized exchanges, these exchanges allow users to retain absolute control of the private keys to their crypto holdings and eliminate the scope for having a single point of failure.

As a result of the element of decentralization, these exchanges prove to be a more effective match for cryptocurrencies, which were originally hinged upon the idea of having decentralized currency.

Any cryptocurrency exchange has four functions to fulfil: capital deposits, order books, order matching and exchange of cryptocurrencies.

In centralized exchanges, only the last function remains truly decentralized as cryptocurrencies exist within the decentralized structure of a blockchain architecture.

In case of a decentralized exchange, all these functions become decentralized and no single entity can control these process.

Owing to reduced needs for identity verification, user registration, KYC/AML formalities etc, a DEX can allow a much higher degree of privacy to any user.

A DEX can often be currency-centric, whereby it can only work with the currency native to the blockchain platform it is built upon (which is Ethereum in most cases).

If a DEX is not currency-centric, it will be currency-neutral where it can work with a variety of different crypto assets. Bisq is an example of the latter variety.

More examples of DEX include Waves, IDEX, Paradex etc.

Pros and Cons of Decentralized Exchanges.

A DEX can offer a user a rather high degree of control over his/her crypto holdings as well as privacy. User registrations and prior deposits are usually not required for a DEX, which makes the whole process of using it clean, easy and private.

With a great deal of flexibility and the non-custodial nature of trading, a DEX can make for a great trading experience.

Perhaps the greatest pro of a DEX is that it will uphold the premise of decentralization so fundamental to cryptocurrencies as a whole.

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Major areas of concerns with regard to decentralized exchanges happen to lie with regard to their low adoption, high latency and high costs, as well as their low volumes and liquidity. Moreover, they are often currency-centric, which can make intra-chain transactions impossible.

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Prashant Jha

As a content writer Prashant believes in presenting complex topics in simple laymen terms. He is a tech enthusiast and an avid reader.

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