Often when you want to buy crypto instantly, you head over to broker sites or financial applications for a seamless transaction. But if you’re a seasoned trader, a trusted crypto exchange site is the go-to place. With an advanced trading platform, it offers everything you need to profit in cryptocurrency.
But even though crypto exchanges offer all the essentials a trader can ask for, they come with their fair share of cons. Centralized and vulnerable to hacks, these sites can be considered as the crypto sphere’s ‘middlemen’ which ironically is what cryptocurrency is attempting to get rid of in the first place.
This is where decentralised exchanges come into the picture. Though it’s lesser-known and mostly belongs to a niche community, decentralised exchanges are the solution that remains true to cryptocurrency’s vision of a completely decentralised community. Learn more about this here at BTC Post!
What are decentralised exchanges?
Like their centralized counterparts, decentralised exchanges or DEXs provide a place for traders to do their business. You can do almost everything on DEXs such as place market orders, trade peer-to-peer and convert crypto from one coin to another with the additional security feature.
Private key custody
When you use centralized exchanges, you don’t hold the private key to your assets. Instead, they are kept on the exchange’s central server that is a hotspot for criminal activity. If the central server is hacked, your funds can be stolen along with other sensitive information.
With DEX, you’re in full control of your assets and there’s no middleman holding your key and keeping your assets for you. That’s why it requires its users to be more aware of their transactions since there’s no customer service you can reach out to.
No central authority
Additionally, DEXs also remove the need for a central authority who can control the site’s processes. The companies behind centralized exchange sites have full control over their services so they can stop accepting orders or delist coins whenever they want. They can also freeze your account just like a bank would in the traditional banking system.
Since there’s no governing body in a DEX, the community is in charge of the transactions between each user. Plus, their funds are not stored in one place so there’s no vault for hackers to break into.
Another downside of centralized exchanges is that they require KYC and AML (Anti-Money Laundering) protocols to protect their client base. While this isn’t a bad thing for security purposes, it puts private information in a vulnerable state since they are stored in a central server. In case of a cyberattack, the whole database can be stolen.
In DEX, there’s no need to create an account and provide identification. Some DEX platforms like BisQ keep your files on your local server. It can only be compromised if your server is hacked.
In line with crypto’s vision
Lastly, decentralised exchanges stay true to the basic tenet of cryptocurrency—to send money through a peer-to-peer network without the need for an intermediary. Today, centralized exchanges act as the ‘middleman’ that makes sure your trading activities proceed smoothly and in line with government regulations. In exchange, you need to provide personal information and give up autonomy over your assets.
Some prefer this setup, thinking that managing your crypto funds is a hassle, so for convenience, they let others handle their funds. However, this structure is similar to the traditional banking system that cryptocurrency shied away from at the beginning. Only this time, instead of banks controlling the funds, we have centralized exchanges doing that for the majority of crypto traders.
Decentralised exchanges stay true to crypto’s vision by offering an alternative to the centralized option. However, this comes at the cost of features. Centralized exchanges offer more features due to their higher capacity.
History of decentralised exchanges
Decentralised exchanges came into existence after numerous hacks on the crypto market’s best and favourite centralised exchanges, with the Mt. Gox incident being the best known hacking story in the industry.
Back when Bitcoin and cryptocurrency were only exclusive to a niche online community, 70% of all Bitcoin transactions worldwide were processed in the Tokyo-based exchange site Mt Gox. After suffering through numerous attacks from 2011 to 2014 and losing US$473 million worth of Bitcoin, Mt Gox announced bankruptcy in 2014.
The Bitfinex hack followed this in 2016 when the leading exchange lost US$72 million worth of Bitcoin. Reuters, a business and financial news organization, estimated that from 2011 to 2017, a total of US$4 billion worth of cryptocurrencies have been stolen from centralised exchanges.
To counter this, decentralised exchanges were created. One of the first platforms released were LocalBitcoins and Bisq. Using ‘Hash Time-Locked Contracts’ or HTLC, users can connect with each other and safely trade assets. To this day, these two DEXs are still used by traders.
Another type of ‘decentralised’ exchanges called Ring Exchanges soon launched where you can send your funds and they will exchange it to whatever coin you want before sending it back to you. However, these were still fundamentally centralized since they hold custody over your coins even if it’s just for a short period of time. Changelly and Shapeshift are some of the notable examples of Ring Exchanges.
Afterwards, the on-chain and off-chain DEXs emerged. On-chain DEXs such as OasisDEX records all transactions on a public blockchain while off-chain DEXs like EtherDelta keep an off-chain order book but records settlement on-chain.
Today, a lot of decentralised exchanges have been built to further secure the custody of coins and prevent security attacks. You’ll find a wide array of DEXs such as Uniswap, Kyber and Airswap where you can make instantaneous peer-to-peer transactions. Just like in centralised exchanges, you can trade using your preferred application and place market orders whenever you want.
Even foundations behind cryptocurrencies themselves create decentralised exchanges where users can convert crypto to their native token. Ethereum (ETH) and Stellar (XLM) are some notable examples with their own DEXs.
The rise of decentralised exchanges
Centralized exchanges still stand in the limelight with millions of users worldwide enjoying their convenience. However, it’s still not too late for decentralised exchanges to grow and get the recognition they deserve. With recent developments, it won’t be long before the crypto sphere recognizes the importance of DEXs and the role it plays in creating a completely decentralised community.
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