“I’m sorry….. I fucked up, and should have done better.”
Those were the words of Sam Bankman-Fried, the Chief Executive Officer of a financially collapsing centralized crypto exchange to his users, employees, and investors alike (story still developing as we speak). Sad situations like this have made some consider whether to switch to using decentralized exchanges.
To address these concerns, in this short article, we would briefly explain what a decentralized exchange is, the factors to consider if you intend to use one, and some tools needed to use a decentralized exchange. First, though, let’s consider what a decentralized exchange is.
What is a decentralized exchange?
A decentralized crypto exchange (DEX) is basically a platform that allows users to perform peer-to-peer trading of assets. By peer-to-peer, in the most basic sense of the word, we mean there is typically no third party needed to facilitate the trade. In other words, the custody of their funds lies with the user and not the exchange operator.
Here’s an example, if Sam wants to sell his bitcoin using a decentralized exchange, he has no need to deposit his BTC into a centralized exchange order book, in other words, granting custody to them before initiating the trade. What Sam simply does is interact with a smart contract that allows him to place the sell trade himself without needing a third party in the middle to facilitate his transaction.
Having learned how a DEX works, some may yet wonder what are the benefits of a decentralized exchange over a centralized one.
Why do some use a decentralized exchange?
There are a number of reasons why trading on decentralized exchanges has been considered to be the preferred choice over centralized exchanges. Below we mention two (2) main reasons:
- Custody of funds: The recent events of the past few days where users who did nothing wrong rather than simply entrust the custody of their funds to a centralized exchange operator have again shed light on one of the main advantages of using decentralized exchanges. When using decentralized exchanges, the custody of funds usually remains with the user, this is considered an advantage because it eliminates the risks of a custodian misusing your funds without your consent, or the risk of your funds being stolen from the centralized exchange by hackers (note, there is also a risk of hack on a decentralized exchange too).
2. Privacy: Unlike centralized exchanges that are often required to comply with KYC/AML (Know Your Customer and Anti-Money Laundering) regulations, decentralized exchanges typically do not require users to submit their identity documents before using their platform. Some may have concerns about the misuse or theft of their personal information on these centralized platforms. However, since having just a crypto wallet (more on that below) is typically what is required to use decentralized exchanges, it eliminates some of the privacy concerns of a CEX as decentralized exchanges do not ask for identity documents of users.
What tool to use on a decentralized exchange
Admittedly, when compared with centralized exchanges, a user needs a far lesser amount of tools to perform a cryptocurrency trade. What do we mean? Let’s explain this a little further.
On a centralized exchange, to perform operations a user typically needs:
- An email/phone number (aka a phone)
- A camera/webcam for KYC purposes
- A bank account/card to initiate deposits, etc.
On a decentralized exchange, to perform operations a user typically need:
- A web wallet or hardware wallet.
Web wallet and Decentralized applications
What is a web wallet? A web wallet as the name suggests is basically a wallet installed and used on a web browser. These web wallets can be installed as extensions in modern web browsers like Google Chrome, Firefox, Brave, etc. A web wallet has often been the most commonly used interface among DeFi (decentralized finance) users as they interact with the front end of decentralized exchanges because of their ease of use.
As with any tool, using a web wallet also comes with some concerns. For example, one may wonder, which web wallet is safe to use. There are a number of factors or checklists to determine what wallet to use, some of the main things to look for are:
- privacy,
- security, and
- user experience.
One such wallet that offers a balanced mix of all those three factors is BlockWallet, a privacy-centric web wallet service provider that offers users the ability to stay private and secure on the blockchain.
Although there are many other web wallet alternative providers one can choose from, it is recommended you make an informed choice on what wallet to use based on the checklist mentioned above.
Conclusion
No crypto exchange, be it a decentralized or centralized exchange is 100% risk-free. In other to keep your funds safe (at least relatively), it is important to have a proper risk management strategy, following up with the latest technology designed to keep your money safe, and then carefully vetting these technologies such as BlockWallet mentioned earlier to ensure they meet the best safety standards in the industry, and all the while maybe hoping that someday things would be “done better”.
Join the BlockWallet community today
Homepage | Medium | Twitter | Telegram Discord | GitHub | E-mail
Disclaimer: The information presented in this piece is merely for educational purposes only, it contains the viewpoint of the author, and does not constitute investment advice. Readers are kindly advised to do their own research on the subject and are free to disagree with the viewpoints shared by the author here. Thank you.
