- Entities such as cryptocurrencies and blockchains have been brought to the mainstream by large centralized exchanges such as Binance.
- However, due to some inherent complications, decentralized exchanges (DEXs) have become popular.
- Though it suffers from a lack of regulatory approval, DEXs offer unique and innovative solutions to trading and investing in cryptos.
Drawbacks of centralized exchange systems
Huge names in the trading space, such as Binance and HBTC, which helped bring cryptos to the mainstream, process as much as $54 billion in transactions on any given day. However, since they depend on third-party web service providers such as Amazon Web Services (AWS), they are prone to vulnerabilities arising from service outages. Such events have occurred in the past leading to temporary halts in trades. Paradoxically, even as blockchain’s core philosophy is decentralization, most exchanges operating in the crypto realm are completely centralized. This gives them the ability to control their users’ digital wallets and funds completely.
The advance of DEXs
Decentralized exchanges, such as Uniswap, CurveFinance, and SushiSwap, offer a new and unique perspective along with a host of security features. They do not depend on a single cloud service provider and are thus completely immune to any service outage as long as a single node is up and running. At its core, a DEX has a range of smart contracts that help manage crypto liquidity flow. Smart contracts eliminate the need to have a third-person intermediary. Thus they operate on a peer-to-peer network, similar to file-sharing services such as BitTorrent. DEXs also offer an increased security level as users are in charge of their own private keys. Even in the case of a hack or an attack, the system continues running as there is no single point of failure. Almost all the DEXs are built on the Ethereum chain and have a current value of $13 billion locked up in them.
The merits and demerits of DEXs:
DEXs provide incentives in the form of yield farming, a phenomenon in which users are encouraged to lend their cryptos to others on the platform in return for interest on the loan. SushiSwap’s creator was engaged in an alleged exit scam, leading to the belief that some DEXs still suffer from an abstract centralization level. Bancor, another DEX, was a victim of a hack which led it to freeze funds, something which an ideal DEX shouldn’t have been able to do. They also suffer from the lack of regulations leading to difficulty in using their services.
However, DEXs are catching up with their counterparts, and their impact cannot be overlooked.
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