What is Decentralized Exchange (DEX)?

What is Decentralized Exchange (DEX)

Decentralized Exchange (DEX) is a Bitcoin exchange facility without forcing traders to disclose privacy or custody of the exchange. DEX offers access to their exchange without Anti-Money Laundering (AML) procedures, meaning users do not need to collect government-issued IDs, addresses, or phone numbers.

Today, Cryptocurrency has exploded into a multi-trillion dollar industry. It’s an amazing innovation like going back to the 1980’s, with advances in cryptography. Since then, there has been a series of events that have shaped the crypto space, of which the first Cryptocurrency, i.e., Bitcoin, has become the most prominent.

In its growth over the last 12 years, the emergence of financial services has been slow for Bitcoin. This is largely due to the inherent lack of stability and adoption.

Mainstream institutions will not accept Bitcoin loans due to their significant price volatility. That’s what makes Bitcoin such a bad asset to accurately plan any investment.

Things are changing rapidly in the crypto space. Decentralized Finance (DeFi Exchange), or decentralized finance is what’s trending right now. Inspired by blockchain technology, DeFi is a financial application built on blockchain technology.

By using a smart contract, it becomes an automatic agreement that can be executed and does not require an intermediary to be executed and can be accessed by anyone with an internet connection.

DeFi consists of peer-to-peer applications and protocols developed on a decentralized blockchain network and does not require access rights for lending, borrowing, or trading as a convenient financial tool.

Most DeFi applications today are built on the Ethereum network, but many alternative public networks are emerging that provide speed, scalability, security, and lower costs.

One of the important functions of DeFi is the Decentralized Exchange (DEX) with the maximum amount of capital locked compared to other DeFi protocols. DEXs allow users to exchange or exchange tokens for other assets, without a centralized middleman or custodian.

Decentralized exchanges (DEX) are becoming peer-to-peer marketplaces where transactions occur directly between Crypto traders. DEX fulfills one of the core possibilities of Crypto, namely driving financial transactions that are not authorized by banks, brokers, payment processors or other types of intermediaries.

Most popular DEXs such as Uniswap and Sushiswap leverage the Ethereum blockchain and are part of a growing suite of decentralized finance (DeFi) tools.

This makes a large number of financial services available directly from compatible Crypto wallets. It’s safe to say that DEX is booming in the first quarter of 2021 with $217 billion worth of transactions flowing through decentralized exchanges. However, in April 2021, there were more than two million DeFi traders, a tenfold increase from May 2020.

Advantages of Using DEX

In Wide Variations

If you’re interested in finding hot tokens in their infancy, DeFi could be the place to be. DEX offers a nearly unlimited range of idex tokens, from the well-known to the weird and completely random.

This is because anyone can print Ethereum-based tokens and create liquidity pools. So,you will find more projects, both checked and not.

Hacking Risk Can Be Reduced

By using DEX because all funds in DEX trading are stored in the traders’ wallets themselves. They theoretically become hack-resistant.

Related to that, DEX will also reduce what is known as “counterparty risk”, namely the possibility of one of the parties involved. This also includes those that have the potential to become the central authority in non-DeFi transactions that will later fail in payment.

No Personal Information Required to Use DEX

You can use it anonymously. Especially for utilities in developing countries, where peer-to-peer lending, fast transactions, and the anonymity that DEXs enable will make them even more popular.

This is because in developing countries it is still difficult to find solid bank infrastructure. Therefore, any user who has a smartphone and internet connection will be able to trade through DEX.

Disadvantages of Using DEX

More Complicated Navigating User Interfaces

You have to do a lot of research because using DEX requires special knowledge. You also have to be careful because there is a possibility of making an irreparable mistake.

For example sending coins to the wrong wallet. The most common problem is called “impermanent loss”, where this impermanent loss can occur due to pairing a more volatile Crypto currency with a less volatile currency in the liquidity pool.

Vulnerable Smart Contracts

Smart contract vulnerabilities Each DeFi protocol is only as secure as the smart contracts that support it. Code can have exploitable bugs even with long tests.

This may result in the loss of your tokens. It is possible that for a while, the smart contract does not function normally. This is due to the fact that not all rare events, human factors and hacks can be anticipated by the developers.

Coins at Risk of Fraud

Riskier coins With lots of unvetted tokens available on most DEXs. Rising tokens can suddenly become withdrawn, when their creators mint lots of new tokens and flood the liquidity pool thereby lowering the value of the coin.

Before you buy a new cryptocurrency or experiment with a new protocol, it is very important to learn as much as you can. You can read the white paper, visit the developer’s Twitter thread or Discord channel, and search for audits for the specific project you’re interested in (some of the larger auditors include Certik, Consensys, Chain Security, and Trail of Bits).

How to Use DEX

  • You can connect to a DEX like Uniswap by using a Crypto wallet like Metamask (for web browser) or Coinbase Wallet (for web on smartphone).
  • Although you can interact with DEX directly from the browser built into Coinbase Wallet, there is an easier way, namely by opening the website on your computer’s web browser (in the case of Uniswap, the address is app.uniswap.org) then clicking “Connect to Wallet .”
  • A QR code will appear and you can scan it with your smartphone’s camera. To do this, tap on the top right corner of the Coinbase Wallet app to access the camera. Once scanned, your wallet will be connected to the DEX.
  • You will also need a supply of Ethereum to start trading on most DEXs. Anything you can get from the exchange is like Coinbase. You need some ETH to pay the fee (known as gas) required for every transaction that occurs on the Ethereum blockchain. This section has fees that are separate from those charged by the DEX itself.

Conclusion from DEX

DEX can be a strategy to maximize trading activity while maintaining security, comfort and privacy. However, you should understand that DEX is not a silver bullet that will solve all the problems that central exchanges face.

DEXs have their own set of problems that traders should keep in mind whenever planning. While DeFi will continue to grow, you can likely see all of the current DEX weaknesses disappearing over time.


Muhammad Zaki Fajrul Haq
Author: Muhammad Zaki Fajrul Haq

Follow me at @mzfajrulhaq (Instagram) or @ZakiFajrul (Twitter).

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