Decentralized Exchanges Risks Review
Centralized exchanges are custodial in nature, meaning that they hold the funds of users and have control over what occurs in the platform. As a way of safeguarding the crypto holdings of their users, they store a bulk of it in cold wallets.
A typical custodial exchange requests that potential users undergo the KYC process and without it, they are either not allowed to use the blockchain-based services or restricted on what services they can enjoy.
The introduction of decentralized exchanges changed many conventional precedents in the crypto landscape. With the introduction of decentralized exchanges, crypto holders could now move over the centralized exchanges by taking complete control of their assets.
The rising use of decentralized exchanges has been responsible for radical growth in attention towards DEX risks apart from their advantages. The examples of the hearings related to GameStop trading volatility showcase doubtful perceptions regarding mainstream adoption of decentralized exchanges or DEX.
What does DEX mean in crypto?
A DEX exchange is a trading platform that allows people to buy and sell their crypto assets and trade directly with other users. Traders use this type of trading platform when they want to exchange cryptocurrencies at market price without the intervention of a centralized authority.
Decentralized Exchanges tend to work with self-executing agreements, removing the need for a third party to hold the funds of different participants.
Usually, there is no middleman that can decide what occurs in the ecosystem. Gas fees are usually cheaper in this type of exchange, and some of them offer no withdrawal fees.
Doubts about Decentralized Exchanges
The use of decentralized exchanges has definitely presented a new array of possibilities for the DeFi sector. At the same time, people are also wondering about concerns like “are decentralized exchanges safe” for the right reasons. The issues pertaining to market access and discrepancies in methods for individual and institutional investors to access decentralized exchanges are some prominent mentions.
At the same time, the involvement of centralized third-party entities in the working of decentralized exchanges also presents questions. Furthermore, the role of blockchain in empowering decentralized exchanges to facilitate trading has also come under scrutiny. Even if blockchain can support the development of decentralized exchanges, it is important to look out for notable DEX risks before participating in the market.
Problems with Crypto Exchanges
Centralized exchanges control access to information and order flow. As we have seen many times, this creates misaligned incentives for privileged parties to abuse this control through internalization and Payment for Order Flow (PFOF). In essence, traders are playing against the house.
Additionally, exchanges have violated the custody of traders’ assets, repeatedly losing those assets to hacks or financial mismanagement.
DeFi was born largely due to the lack of trust in financial intermediaries. Meanwhile, mass market adoption of DeFi has been obstructed by the inability of DeFi to meet the expectations established by the tools of traditional finance.
Slippage and front-running create inefficiencies for large traders, and high gas/platform fees make them less accessible for smaller traders. Platforms lack composability, requiring bridges that are susceptible to hacking. Decentralized exchanges cannot compete with centralized and traditional trading without addressing predation, friction, risk, and fragmentation all together.
The failures of these systems manifest for different reasons, but affect traders similarly: risk is increased, and profitability decreases. Deepwaters combines the best of centralized and decentralized platforms while adding novel functionality to provide a service which is highly efficient, compliant with regulations, yet trustless.
Decentralized Exchanges Review
A decentralized exchange (DEX) is a specific type of cryptocurrency exchange designed to facilitate peer-to-peer transactions. Uniswap, SushiSwap, PancakeSwap, Kyber, and Balancer are among the most popular decentralized exchanges today, but there are many alternatives as well.
For this reason, decentralized exchanges typically boast much lower transaction fees compared to traditional alternatives.
Another key difference between decentralized exchanges and centralized exchanges is the fact that decentralized exchanges are non-custodial. This means they do not take custody of a user’s funds. Instead, the end user is always in control of their assets and keys.
Any discussion on DeFi necessitates a conversation on the primary means of exchange in the decentralized world; enter DEXes.
DEXes have always commanded notable levels of TVL across DeFi and the category currently tops the charts in both TVL and number of protocols with over US$23B in TVL split across 470+ protocols.
According Binance Research Crypto Market Review, having peaked near US$25B of TVL earlier this year, Curve is the largest DEX in DeFi. Curve is an AMM-based DEX, which focuses its attention on stablecoins and other stable pairs and thus maintains lower fees, slippage and minimizes impermanent loss when compared to other competing protocols. Curve also maintains composability as an aim and has integrated with Compound, Yearn Finance and Synthetix among others.
The Curve DAO, controlled by the CRV token, is also a major part of the puzzle and the accumulation race for the control of DAO has led to the aptly named ‘Curve Wars’.
Curve has been actively deploying across chains and is currently active across both L2 and alt-L1 chains. In the first half of 2022, Curve has integrated with Optimism, Moonbeam, and most recently with NEAR Protocol’s Aurora network.
With stablecoins demonstrating considerable growth over the last couple of years, and generally expected to grow in size with increased crypto adoption, the future looks bright for this behemoth of the DEX space.
The protocol is governed via the UNI token and, through its recent v3 upgrade, is now deployed on the Ethereum mainnet, as well leading L2 scaling solutions, Polygon, Arbitrum and Optimism.
Uniswap has seen its market share grow this year and very recently announced the acquisition of NFT marketplace aggregator Genie. While not their first foray into NFTs (they offered NFT liquidity pools in 2019 i.e. “Unisocks”), the move is notable and will allow users to buy and sell NFTs directly on the Uniswap web app. They will also integrate NFTs into developer APIs and widgets and thereby make “Uniswap a comprehensive platform for users and builders in web3”.
by Peter Sonner
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Full Report — https://beinsure.com/decentralized-exchanges-risks-review-what-is-a-dex-cryptoexchange/
More Outlooks & Review — https://beinsure.com/
