In a recent article, we talked about the exponential growth of the DeFi sector and looked at the alternative reality of finance. One of the in-demand services that it provides is the exchanges where cryptocurrencies are being traded. Unlike centralized exchanges, which don’t allow you to have complete control over your assets, DEXs operate on the principle of anonymity. This is the exact principle that helped to increase the interest in crypto in the first place.
As the crypto industry developed, government regulators began to pay attention to crypto exchanges, demanding to legitimize this activity by introducing customer identity verification and providing account information upon request. It is not hard to guess that these measures have caused the outrage of many crypto evangelists, which has only increased the demand for decentralized services. Many users have a strong sensitivity regarding Satoshi Nakamoto’s idea to build a decentralized world. The approach here lies in a transparent financial system that provides greater financial inclusion for everyone and at the same time protects the privacy of people when making transactions. Here the DEXs have never been truer.
What is DEX?
DEX is a decentralized exchange for trading digital assets directly between participants (P2P) without any financial intermediaries. It does not store users’ funds and personal data and acts only as a type of pair matching that allows people to place orders and buy and sell cryptocurrency.
DEXs are aimed to change the financial user experience offering users to trade directly with each other on-chain. The process relies on smart contracts and on-chain data to facilitate peer-to-peer transactions through which digital assets can be passed from one wallet to another. As a result, users who trade assets through a DEX remain anonymous, as all transactions are encrypted and the identity of those who participate is reduced to their wallet number.
The way it works
Most decentralized exchanges use automated market makers (AMMs), which are protocols that provide liquidity to all assets in the market. Instead of an order book, as on traditional exchanges, assets are automatically traded following predefined mathematical formulas.
Decentralized exchanges perform without the need to store the assets themselves. Instead, the exchange creates pools of liquidity from tokens traded through its trading terminals. The capital to fund liquidity pools is provided by users in exchange for a percentage of commission fees.
The DEX algorithm sets the asset price following the dynamics of supply and demand. The token pooling fee is also adjusted depending on these dynamics.
How you can benefit
To summarize DEX’s features, we can highlight the following benefits:
- Privacy. Centralized crypto exchanges may ask you for a KYC procedure, but DEXs work based on anonymity. So, no need to worry about the security of your data.
- Cheaper Transaction Fees. Centralized exchanges bear the additional cost of setting up and maintaining your account. Whereas, decentralized crypto exchanges work on the principles of automation and self-regulation.
- Reliability. A decentralized nature makes the hacking risk almost next to impossible. If you are an investor who is most concerned about hacking issues, this is the best choice for you.
- Full access. You have complete control over your funds, private keys, and transactions, and at the same time, full responsibility for your actions.
- Wide choice. Users can trade new and obscure cryptocurrencies that previously were difficult to exchange elsewhere.
- Financial Inclusiveness. Many institutions restrict people from certain jurisdictions from using their services. DEXs create a much more inclusive and fair ecosystem because anyone from anywhere in the world can utilize them.
Find the right one
For those, who have not yet decided which decentralized cryptocurrency exchange is the best fit, Finscanner has prepared the most popular user choices:
- Uniswap — an open-source decentralized exchange protocol built on the Ethereum blockchain and operated by smart contracts. The popularity of the Uniswap decentralized exchange is breaking records as it ranks first in the Ethereum (ETH) network. Full decentralization, anonymity, availability of a large number of coins.
- PancakeSwap — a decentralized cryptocurrency exchange powered by the Binance blockchain. The exchange was founded in 2020 and has already gained great popularity in DeFi. Today, its daily turnover is over $ 800 million.
- SushiSwap — a decentralized exchange created on the basis of Uniswap that allows users to trade digital tokens on the Ethereum blockchain. In addition to cryptocurrency trading, there is a lending market and tools for passive earnings.