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A decentralized exchange (DEX) is a digital marketplace that allows direct trading of altcoins without having to trust a third party in order to swap tokens. DEXs offer many advantages, such as reduced transaction fees, more autonomy over one’s holdings, and less red tape around exchanges and transactions. Using a decentralized exchange can also mean faster liquidity of funds and fewer regulations. This makes the DEX the choice trading tool for more experienced crypto investors.
Decentralized exchanges (CEXs) use smart contracts, enabling investors to execute trades without a mediator. That’s how they’re able to keep their fees so low — there’s no middleman taking a cut from each trade. Seasoned traders better experienced at navigating choppy waters are better suited to using a DEX.
Centralized exchanges are run by a financial organization, such as a bank, that gives the exchange its legitimacy and oversees all trades. They charge a percentage of the amounts exchanged during any trade as a fee for the provided services. Centralized exchanges usually have to adhere to more rigid regulations. They’re the easier and safer choice for beginning traders who are learning the ropes.
DEXs work by allowing direct transactions and reducing regulatory rules around them. Like all trading platforms, they have both pros and cons. To find out more, read our detailed guide here. In the meantime, here's a quick summary.
Decentralized exchanges are usually among the first to list tokens created on the same blockchain, meaning early-bird opportunities for traders.
A low or no transaction fee is one of the more appealing features of a DEX.
The biggest advantage of using a decentralized exchange is having less red tape. Centralized exchanges have a detailed screening process, known as KYC, for traders. DEXs are usually exempted from these regulations, meaning more anonymity for traders. Traders can also access a wider range of coins and tokens than with a centralized exchange.
DEXs are safer for traders than centralized exchanges in case of hacks and scams, since funds aren’t stored with the platform. This also means more security against counterparty risks.
A big drawback of DEXs is that not everyone can trade without at least some experience and knowledge of the ins and outs of crypto trading.
Due diligence is crucial because errors are easier to make. The result can be a total loss of funds, stuck payments, or high charges if the platform isn’t used correctly.
Rug pulls are certainly a real risk for investors when using decentralized exchanges. Since listing tokens is open to anyone, traders are still susceptible to scams and losses.
DEXs have come a long way since their inception. Here are the top two exchanges trending today:
Currently the top DEX, dYdX is powered by smart contracts on Ethereum. It offers the benefits of a decentralized exchange, along with the speed and ease of use of a centralized exchange.
An exchange offering its members trading options without any fees or platform charges, Uniswap is a self-proclaimed public welfare exchange working as a tool for fast and easy transactions.