AI Products 

Decentralized Exchanges Vs Centralized Exchanges

Boopathi Krishnan
Decentralized Exchanges Vs Centralized Exchanges

 Centralized Exchanges and DEXs : They offer different features and advantages. Centralized cryptocurrency exchanges perform critical functions within the global cryptocurrency economy. They facilitate large-scale trading (including margin trading), bridging the gap between fiat and cryptocurrency. They also provide liquidity and function as an entry point into the cryptocurrency market for new cryptocurrency users.

Decentralized Exchanges: They take a different approach to cryptocurrency trading. Their goal is to cut out the middlemen Blockchain Development services A DEX operates without a centralized authority to facilitate transactions. Instead, DEXs rely solely on trust enforced by code, using smart contracts to match and execute trades.

A user trading on for example, deposits fiat currency or cryptocurrency into a wallet hosted on the platform. Client funds deposited with Swyftx are then used to trade on the Swyftx exchange platform and can then be withdrawn to an external wallet by the user.

Crypto deposited on Swyftx is secured through a range of different security practices including external penetration testing, third-party security auditing, biometric authentication, two-factor authentication, and more.

Using a DEX, a user must connect their cryptocurrency wallet to perform operations on the platform. Once the trade is closed, trading fees are automatically deducted and crypto assets are added or subtracted from this wallet.

💡 Did you know that?

A non-custodial wallet is one where you have full control of your private keys. A custodial wallet reduces personal liability but requires trust in the custodian that stores your assets. This custodian is usually a cryptocurrency exchange .

How does a decentralized exchange work?

Decentralized cryptocurrency exchanges are built on top of blockchain networks, such as ethuruem, that integrate smart contract functionality. In simple terms, DEXs use complex smart contracts that users interact with to trade.

Decentralized exchanges can take a variety of different forms. Some exchanges are more decentralized than others. Most DEXs fall into one of three categories: On-chain order books, Off-chain order books, and Automated Market Makers.

On-chain order books

DEXs that use on-chain order books , such as 0x or IDEX , operate in a completely decentralized manner,  with network nodes on a blockchain dedicated to maintaining order records for an on-chain operating order book. blocks. Transactions made in this type of DEX must be confirmed by the miners of the network.

Off-chain order books

Decentralized platforms that use off-chain order books , such as , record transactions and execute order book functions in an off-chain environment hosted by a centralized third party. Off-chain order book DEXs are generally considered semi-decentralized due to the presence of a centralized authority in their structure.

Automated Market Makers

Automated Market Makers (AMMs) are a relatively recent development within the DEX ecosystem. Automated market makers rely solely on smart contracts to execute trades and do not need order books, leveraging liquidity pools to facilitate instant trades. The network is a great example of a decentralized trading platform that uses AMM.

Advantages and disadvantages of the decentralized exchange (DEX)

After having given the answer to the question “What is crypto DEX?” and having deciphered its operation, we can analyze what advantages and disadvantages these cryptography services have.

Decentralized exchanges offer a number of advantages to cryptocurrency traders who are concerned about security or prefer to maintain a high level of control over their digital assets. Let’s start with the advantages.

Advantages of Decentralized Exchange (DEX)

  • You do not need to provide any personal data to use a decentralized crypto exchange. There is no registration and verification system. Anonymity is one of the main advantages for those who trade cryptocurrencies. That is, DEX users have their own private keys and are responsible for managing the security of their assets.
  • Your funds are stored in your crypto wallet, and not on the exchange platform. DEX creators will not be able to take your funds in any way as they do not have access to them.
  • Even the best and most reliable centralized exchanges can fall victim to hackers or experience technical issues. This never happens on a DEX platform where each user keeps their private keys.
  • Another advantage of decentralized exchanges is their absence of control or censorship by governments. The absence of a specific executive team to which sanctions or requirements can be applied prevents the authorities from controlling the transactions carried out on the platform, stopping the operations and freezing the funds.
  • Greater privacy and anonymity. The decentralized nature of DEXs means that they do not typically implement Know Your Customer (KYC) controls, providing users with the ability to trade cryptocurrencies without revealing any personal information to a centralized exchange platform.
  • Wide range of small-cap altcoins. Some decentralized exchanges offer a larger range of altcoins and smaller cryptocurrency projects that may not be listed on major international cryptocurrency exchanges. However, these coins are subject to less scrutiny or regulation, meaning they can be riskier investments.

Disadvantages of Decentralized Exchanges (DEX)

  • Difficulty using them. First of all, it is about the lack of many useful trading tools. For example, there are no stop losses, linked orders and trailing stop orders.
  • They provide pairs of crypto assets within the chosen blockchain. If you have chosen Ethereum, you will only be able to trade assets that exist on this network. Therefore, it will not be possible to exchange Ethereum for Bitcoin as they are on different blockchains.
  • The operation of these services is more complicated than that of their centralized competitors.
  • Sometimes there is little liquidity on DEX trades, especially with the less popular pairs. Some decentralized exchanges have liquidity issues: the liquidity available on a DEX is determined by the number of active traders and the trading volume on the DEX. Therefore, it can be quite difficult to find someone who is willing to buy or sell an asset at a reasonable price.
  • There can be large commissions when taking any action on the Ethereum network.
  • Order speed may be affected by network congestion. Decentralized exchanges are limited by the speed and scalability of the blockchain network they operate on. Trades executed on a DEX that operates via smart contracts must be confirmed by miners before being processed. Periods of congestion on the network on which a DEX operates can cause “price slippage”, in which a trade is not executed due to price movement in the assets traded during the time period of the trade.
  • Exposure to risky investments. Decentralized exchanges are for the most part unregulated and in most cases do not investigate token listings. Anyone can create a new token on many DEXs and offer liquidity and trading pairs. Although some decentralized exchanges now incorporate smart contract auditing into the listing process, less DEX-savvy users expose themselves to additional risk when investing in unverified crypto assets.

Blockchain development company

Boopathi Krishnan
Zupyak is the world’s largest content marketing community, with over 400 000 members and 3 million articles. Explore and get your content discovered.
Read more