Course Content
What Is a Decentralized Exchange (DEX)?
You probably know the drill with cryptocurrency exchanges. Sign up with your email, come up with a strong password, verify your account, and start trading cryptocurrency. Decentralized exchanges are like that, minus the hassle of sign-ups. In most cases, there’s no depositing or withdrawing crypto. The trade happens directly between two users’ wallets, with limited (if any!) input from a third-party. Decentralized exchanges can be a bit trickier to get the hang of, and they might not always have the assets you want. But, as the tech and interest in it grow, these may very well become integral components in the cryptocurrency sphere.
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What Is a Decentralized Exchange (DEX)?
About Lesson

We’ve touched on some of the advantages and drawbacks of DEXs in broad strokes in the previous sections. Let’s delve into them a bit more.

Pros of DEXs

No KYC

KYC/AML (Know Your Customer and Anti-Money Laundering) compliance is the norm for many exchanges. For regulatory reasons, individuals must often submit identity documentation and proof of address.

This is a privacy concern for some and an accessibility concern for others. What if you don’t have valid documents on hand? What if the information is somehow leaked? Since DEXs are permissionless, no one checks your identity. All you need is a cryptocurrency wallet.

However, there are some legal requirements when DEXs are partially run by a central authority. In some cases, if the order book is centralized, the host must remain compliant.

No counterparty risk

The primary appeal of decentralized cryptocurrency exchanges is that they don’t hold customers’ funds. As such, even catastrophic breaches like the 2014 Mt. Gox hack won’t put users’ funds at risk or expose any sensitive personal information.

Unlisted tokens

Tokens that aren’t listed on centralized exchanges can still be traded freely on DEXs, provided there’s supply and demand.

Cons of DEXs

Usability

Realistically, DEXs aren’t nearly as user-friendly as traditional exchanges. Centralized platforms offer real-time trades that are unaffected by block times. For newcomers unfamiliar with non-custodial cryptocurrency wallets, CEXs provide a more forgiving experience. If you forget your password, you can simply reset it. If you lose your seed phrase, however, your funds are irretrievably lost in cyberspace.

Trading volumes and liquidity

The volume traded on CEXs still dwarfs that of DEXs. Perhaps more importantly, CEXs tend to have greater liquidity, too. Liquidity is a measure of how easily you can buy or sell assets at a reasonable price. In a highly liquid market, bids and asks have little difference in price, signifying high competition between buyers and sellers. In an illiquid market, you’ll have a more difficult time finding someone that wants to trade the asset for a reasonable price.

DEXs are still relatively niche, so there isn’t always supply or demand for the crypto assets you wish to trade. You may not be able to find the trading pairs you want to use, and if you do, assets might not trade at a fair price. 

Fees

Fees aren’t always higher on DEXs, but they can be, particularly when the network is congested or if you’re using an on-chain order book.
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