What is a cryptocurrency exchange?
Centralised and decentralised Exchanges are platforms that enable cryptocurrency holders and traders to buy, sell, or acquire tokens from one another. These exchanges are also known as cryptocurrency marketplaces.
Practically speaking, cryptocurrency is just one of many assets available on most exchanges, but for this blog post, we’ll focus primarily on crypto.
An exchange can be centralised or decentralized. Examples of centralised exchanges are Binance Exchange, Coinbase Exchange, KuCoin, and Karen, while decentralised exchanges are Uniswap, Pancakeswap, dYdX, and Sushiswap.
Related blogpost-https://www.effectivebusinessideas.com/decentralized-finance/
DEXs, what are they?
Decentralised exchange is not so different in its purpose from what a typical exchange would do, but just with the twist of the decentralised, peer-to-peer structure.
A decentralised exchange is a market that allows crypto holders and buyers to transact with cryptocurrency without the supervision of a third party like a bank, broker, or any regulatory financial body. A decentralised exchange (DEX) uses its peer-to-peer marketplace structure to foster a major vision for the financial world, which is to be able to perform unsupervised financial transactions.
The Ethereum blockchain dominates the world of decentralised finance, especially because the prominent apps are based on the protocol of the Ethereum blockchain, making it possible to perform transactions using any compatible wallet. The constantly increasing number of traders using decentralised exchanges has only proven that it has come to stay and stay for good.
How Dexs work
Starting in decentralised finance, you’ll notice transactions occur between crypto assets rather than between fiat and crypto. On centralised exchanges like Binance or Coinbase, you can trade both crypto-to-fiat (e.g., BTC/USD) and crypto-to-crypto (e.g., BTC/ETH). Complex options like margin trading, futures trading, and spot trading are controlled by an order book that is closely supervised by the exchange. This order book establishes the particular price of that crypto asset based on the amount of buy or sell orders made on that asset.
Decentralised exchanges, however, do not use an order book to establish price but work using a set of smart contracts. Using the pool of locked investors’ funds called the “liquidity pool” to establish the price of tokens against each other. Since there is no party or a central body to monitor the database and store the information, all transactions are directly stored on the blockchain.
DEXs are built using open-source code programming, so they’re available to the public and can be used to layer a project that is similar to them. This is a large reason why exchanges like Pancakeswap, Cowswap, and Sushiswap have layered their protocol with the codes used to layer the Uniswap ecosystem.
Getting Started on a DEX
It’s so easy to use a decentralised exchange that you don’t even need an email address or to sign up or log in to make trades. All it requires is to have a wallet that is compatible with the smart contract and the programming protocol of the exchange. For example, the Popular Metamask wallet is compatible with an exchange like Uniswap.
To get started, it only requires a smartphone and internet connection. The first step is to make a choice on your preferred network, and there are a vast number of exchanges over the blockchain. Ensure that you have done your proper research before choosing a network. Each transaction costs what is called a gas fee, and the cost of this fee varies from network to network.
Photo credit – theblackwomenintech
After you have confirmed your preferred exchange network, the next step is to carefully download a compatible wallet on your mobile app store or download the browser extension from the wallet’s website and install it on your browser. Ensure you are carefully following the process, as the wrong website can lead you to lose your money or your assets. After installing, the next step is to fund your wallet with the native token of your exchange network. I.e., ETH, SOL, or POLYGON.
Note: When trying to install your wallet for the first time, you will be given a 12-24 seed phrase that will allow you to access your wallet on another device. Failure to recollect these seed phrases will result in the unrecoverable loss of your crypto asset. So, ensure you have multiple backup options to store your seed phrase. You will also choose a password that applies to that device when you want to perform transactions. However, the seed phrase is the most important security key.
Hidden Potentials in DEXs
Variety of Tokens to Trade with
The security and assessment protocol involved in centralised exchanges makes the number of tokens to transact with limited possibility. However, in decentralised exchanges, there are so many tokens surfacing rapidly, and they are first listed on the exchange whose protocol it was built with before they start getting approved on centralised exchanges. This can be a big security issue, but it is also a great advantage because getting in early enough means that you can be a part of the bullish trend of the token.
Note: When trying to get the best of a new token, beware of rug pulls so that you don’t acquire a token that is useless after all.
Anonymity
Trading on a centralised exchange means that your data are clearly known by that exchange, but not so in the case of a decentralised exchange. Since it is a peer-to-peer transaction, the exchange does not have to know its users’ identities.
Greater potential for security
The trader is completely responsible for the security of the assets in their wallet; the exchange is at a lesser risk of being the reason for the loss of funds.
Extra Note on DEXs
The limitations of trading on a decentralised exchange are majorly tied to the fact that it is still being understood, and as developers come up with newer networks, they are an improvement on existing networks; below is a list of drawbacks for DEXs:
- It is a complex setup and requires a lot of patience to work on.
- Some traders consider its lack of FIAT a drawback.
- Unvetted tokens can be listed on the exchange.
- Smart contracts can be vulnerable in a few cases.
Popular DEXs in 2024
- Offers a wide range of tokens, being Ethereum’s first and most prominent exchange.
- A transaction fee is less than 1%.
- Gas fees can be very high.
- Interface that makes it easier for beginners to trade.
- Offers low transaction fees
- Offers high leverage for tokens on the derivatives market.
- There are no transaction fees, although since it collects data from other exchanges, traders might have to pay some fees.
- It saves time and energy for traders.
- Offers a price that is better than most, if not all.
- It has a superior user interphase
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