Decentralized Exchanges (DEX): What’s all the fuss?
Everyone knows that when a financial topic hits Fortune or the Wall Street Journal, it’s trending. Both publications have started covering decentralized cryptocurrency exchanges, which gives users and investors more control over their crypto funds.
It’s not just about the media. Researchers at Messari reported that decentralized exchanges processed $122 billion in transactions during the record-breaking April 2021 bull run, compared to just $1 billion in April 2020.
Analysts at DEX Metrics reported that as of July 2021, decentralized exchanges such as Uniswap, PancakeSwap, Venice Swap and Finance DEX were trading about $15 billion every week. That’s less than 10% of the total crypto trading volume, but the rapid growth of the technology and the market’s acceptance of it is quite impressive. It’s no surprise that people are interested in it.
Decentralization is one of the core values of the crypto world. Crypto transactions are carried out freely, without approval, regulatory oversight or high fees from banks and other financial institutions. This is one of the benefits of using and investing in cryptocurrencies. Every decentralized crypto aim to bring the benefits of decentralization to crypto buying, selling and portfolio management.
Decentralized Finance (Defi) Applications and Use Cases
DEX enthusiasts argue that centralized exchanges like Coinbase, FTX and Binance bring many of the features of traditional banks to the crypto world. They envision a future where users rely on smart contracts to do business with each other on the blockchain, without centralized exchanges that compromise user anonymity, impose fees, hold funds, regulate transactions, decide which coins and tokens to support, or attract hackers.
Others worry that those who leave traditional exchanges behind will end up in dangerous situations. Centralized exchanges provide many essential services such as user education, customer support, trading partner verification, lower fees, security, managed liquidity pools, coin history information, price histories, and more. Reputable exchanges comply with consumer safeguards, including laws, financial regulations, and licensing requirements in the countries where they do business. These features are absent in the DEX world. Even the best decentralized exchange cannot offer the support and ease-of-use features found on traditional platforms like Venice Swap.
What is a decentralized exchange? Wall Street Journal financial reporter Alexander Osipovich may have explained it best in a May 2021 article. Decentralized exchanges are “less like the New York Stock Exchange and more like Napster, which no longer exists,” Osipovich said.
How Does a Decentralized Crypto Exchange Work?
On a traditional cryptocurrency exchange, you start your transactions by creating an account and providing KYC to the site. After making a deposit or linking your existing crypto wallet, you can buy, sell, and exchange cryptocurrencies, make an instant trade, or build a long-term portfolio.
On a decentralized crypto exchange, you connect your cryptocurrency wallet to the software running on the website. If you want to buy or trade crypto assets, just specify what you are looking for. The decentralized exchange app tells you the price, and if you confirm, you complete the transaction. You never log in, provide a name or email address, or create an account.
Decentralized crypto exchanges don’t match you with an individual seller. Instead, they use automated market makers to offer you coins and tokens from a liquidity pool, which is a quantity of cryptocurrency that other users make available for a set period. When you buy crypto on a decentralized exchange, you are buying from a liquidity pool.
The AMM approach means you can participate in liquidity pools by lending them money. You can make your cryptocurrencies available for a week, a month, or any other specified period. At the end of the period, you get back your funds and a portion of the transaction fees generated by the liquidity pool. This is like buying government bonds.
Sophisticated DEXs give you a lot of control over how you participate in the liquidity pool. For example, you can only make tokens available within a certain price range. Sophisticated traders adjust these options to increase their profits.
That’s DEX in a nutshell. Essentially, they are intermediary services that connect crypto buyers to pools of crypto funds available for purchase.
What is a DEX — Do You Need One?
DEXs are a step in the evolution of the world’s digital economy. In the long run, their weaknesses will be addressed, and their benefits will be matched by traditional exchanges. Hybrid exchanges are already emerging, aiming to offer the best of both worlds.
Trade on Venice Swap for the best decentralized exchange experience.
