Whether you’re a trader or investor, the most popular way to buy and sell cryptocurrencies such as bitcoin is by going through a crypto exchange.
There are several hundreds of crypto exchanges out there. A common way you’ll see exchanges categorised is based on the presence or absence of third-party control and ownership.
If an exchange is owned and controlled by a third party, it’s considered a centralised exchange. If it is not, it’s considered a decentralised exchange (DEX).
This resource is all about DEXes. Keep reading to learn about what DEXes are and why people choose to use them over centralised exchanges such as Independent Reserve, CoinSpot and Binance.
About Decentralised Exchanges (DEXes)
As we just touched on, a DEX is simply a crypto exchange that exists without a third party controlling and owning it.
Buying and selling cryptocurrencies on DEXes is possible because a DEX is essentially just a system of smart contracts. These smart contracts are deployed on a blockchain such as Ethereum.
(A smart contract is computer code that is able to be stored and executed on a blockchain. Smart contracts self-execute when and if certain predetermined conditions are met.)
Virtually all popular DEXes—such as Uniswap, KyberSwap and IDEX—run on the Ethereum blockchain network. When you click ‘buy’ on a DEX, what you’re actually doing is prompting smart contracts to perform certain tasks that result in you gaining access to whatever cryptocurrency you decided to buy.
Most popular Ethereum DEXes as at June 18, 20 (Source: Etherscan)
Features of Decentralised Crypto Exchanges
Wherever you are in the world, you’re able to access and use a DEX. You can do this from your smartphone, tablet, laptop and desktop computer. All you need is access to the internet and a crypto wallet.
You’ll often see DEXes described as non-custodial. Many people use the terms ‘decentralised exchange’ and ‘non-custodial exchange’ interchangeably. Non-custodial just means your cryptocurrencies cannot be custodied (i.e., controlled) by the exchange operator. (That’s because there’s no such thing as an ‘exchange operator’ when it comes to truly decentralised exchanges.)
This is in contrast to centralised exchanges, which are custodial in nature. That’s because when you buy cryptocurrency on these exchanges, you don’t actually own them. To gain control over cryptocurrency bought on centralised exchanges, you need to send it to your wallet.
A truly decentralised exchange will never ask for, nor need, your personal details in order for you to start trading. To start using a DEX, all you need to do is connect your wallet. (All DEXes make it clear which wallets they support. MetaMask is widely supported.)
Centralised exchanges make users enter a lot of their personal data for storage on the exchange’s database, and users are required to enter these details upon login to the exchange. The exchange is then in control of your private keys and is the protector of your assets.
Why Use a DEX to Buy & Sell Cryptocurrency?
Compared to centralised exchanges such as CoinSpot and Independent Reserve, DEXes have a number of advantages.
- Pseudo-anonymity: DEXes provide you with a way to buy and sell cryptocurrencies without forcing you to share your private information. To access the full functionality of a centralised exchange, you typically must go through a know-your-customer process and trust that the exchange operator will safeguard your details.
- Security: When it comes to DEXes, hackers wanting to steal cryptocurrencies have no ‘honeypot’ to target. This is in contrast to centralised exchanges, which have fallen victim to many hacks over the years—resulting in users losing the cryptocurrencies they bought on the exchange.
- Accessibility: A truly decentralised crypto exchange can be accessed from anywhere in the world. Centralised exchanges are typically forced to block certain geographic areas from accessing its platform in order to comply with regulations.
Drawbacks of Using a DEX
Whilst there are many reasons why you’d use a DEX, they aren’t without their drawbacks when compared to centralised crypto exchanges.
- Responsibility: When it comes to DEXes, it’s on you to not lose your seed phrase to your wallet. This is too much responsibility to bear for some, especially those who aren’t as tech-savvy or familiar with DEXes.
- Liquidity: Trading volumes on centralised exchanges have historically been orders of magnitude greater than DEXes. Trading on an exchange with relatively greater volumes means you’re more likely to be able to buy and sell cryptocurrencies with minimal wait time and slippage.
- Support: Whilst many third-party tutorials exist online, a truly decentralised exchange doesn’t have a dedicated support team that can answer your questions or fix any errors you may make.
Final Word on DEXes
Blockchain and smart contract technology make it possible to remove the need to trust central parties. DEXes are one early example of this.
It is true that centralised exchanges remain significantly more popular than DEXes. That said, DEXes continue to improve from both a user-experience and liquidity standpoint. A big reason behind these improvements has been the emergence of decentralised finance (DeFi) on Ethereum.