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A decentralized exchange (DEX) is a cryptocurrency exchange that works without the intervention of third parties. For those who have not yet worked with cryptocurrencies and do not know it, the purchase and sale of digital assets is usually done through a centralized exchange platform. And it requires the transfer of funds, even for a moment.
This can be avoided by using a DEX, which uses smart contracts on the blockchain to perform transfers and trades. However, DEXs are still not as popular as centralized ones. This is because decentralized networks are difficult for newcomers to understand. What brings, as a consequence, that centralized platforms such as Binance are used.
In short, a decentralized exchange allows you to trade without the involvement of third parties, albeit at the cost of less liquidity and higher transaction fees.
Exchanges are the backbone of the blockchain ecosystem. Thanks to them, users can exchange their crypto assets, either for other crypto assets, or for fiat currencies. In general terms, when we talk about types of exchanges we can talk about two basic types: centralized and decentralized.
Centralized Exchanges (CEX): These are platforms that allow you to exchange cryptocurrencies with each other. They have a built-in infrastructure that maintains an order book and handles transactions on behalf of the exchange through an API or web interface. Some examples are Binance and Kraken.
Decentralized Exchanges (DEX): This type of platform allows users to trade their cryptocurrencies directly with each other, using smart contracts.
Decentralization is safer than centralization because it removes the negative points from the equation. In centralized exchanges, all data is stored on a central server and all transactions go through this server before being verified by the network. As such, this creates a natural risk for users. In DEXs, on the contrary, operations are carried out directly between users through an automated process. In addition, decentralized exchanges offer, among others, the following advantages:
1) If a node goes offline or loses power, trading will continue unaffected as all nodes participate simultaneously in each transaction.
2) More security means more privacy. Transactions cannot be traced back to individual wallets unless someone reveals their private key.
3) They do not keep customer funds, they facilitate operations directly between buyers and sellers.
4) Anyone can place orders without anyone matching them, that is, no one is needed.
5) On decentralized exchange, each user controls their own private keys, while on centralized exchange you can't.
6) They are more transparent than centralized exchanges because there is no central authority dictating how things happen.
Although the decentralized exchange has many advantages, it also has some disadvantages on its side. Perhaps the main one is that decentralized exchanges are slow and difficult to use. They do not always allow you to trade fiat currencies (for example, dollars or euros). This means that you first have to buy Bitcoin, or another cryptocurrency like Ether, before you can sell your assets for fiat currencies. This can be somewhat difficult for newcomers who are not familiar with how these types of platforms work.
Another problem with decentralized exchanges can be security. Since the user is the only one in control of his private keys, it will be a big problem if he loses them. There is no way to get your crypto assets back.