For better understanding decentralized exchange, or kindly DEX, it is essential to understand how centralized exchanges works. As the name suggests, centralized exchanges works around a central entity supposedly reliable which realize operations on behalf of your customers. In return, the company charges a percentage of negotiations, transactions and even withdrawals.
However, some problems might happen due to the centralized aspects. The vulnerability of the system is one of them. Malicious cyber attacks are not that uncommon once the exchange has all customers credentials and funds focused on one system only.
Trusting those exchanges is the same thing of giving your security key to them – if the entity is violated, many funds will be lost. Besides, some situations involving brokerage firms or exchange administrators who have stolen all money or simply disappeared. Between 2011 and 2017, for example more than $4 billion of cryptocurrencies have been stolen from exchanges according to a Reuters estimate.
Decentralized exchanges has coming up as a solution to solve those problems. The first point is that nobody, not even companies or platforms, will holds your crypto. In fact, everybody holds your cryptocurrencies once they only exist as entries in distributed ledgers – a copy of which is maintained by every node on a network.
A trader in a decentralized exchanges doesn’t have to entrust their funds to anyone. Instead, they trades directly to another using a blockchain to validate the operation. Funds are kept in a digital wallet and is traded using decentralized exchanges – which has the responsibility to find a interested buyer or seller.
As the exchange is executed on a distributed ledger and you don’t have to go through the responsibility of third parties, the negotiation between any cryptocurrency becomes possible. Therefore, tokens negotiations and usability would be possible anywhere, making government regulation almost powerless to stop it.
Differently from a centralized exchange, each user is responsible for managing its wallets and security keys. What prevents centralized cyberattacks and aims more autonomy, an important characteristic, since its inception, about blockchain technology.
On the other hand, downsides like hacks still possible and in some cases only depends on getting your phone number. Also, if you lose or forget your private key will be no other way to get access to your digital wallet. And, if that happens, there’s no one else to blame but yourself.