CoinMarketCap ranks the top decentralized exchanges based on trading volumes, market share of DeFi markets.
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What Is a Decentralized Exchange?
A decentralized exchange — or DEX — is a cryptocurrency exchange that operates without a central authority.
How Does a Decentralized Exchange Differ From a Normal Cryptocurrency Exchange?
Traditional cryptocurrency exchanges work in a centralized manner: the exchange not only provides a venue for buyers and sellers to conduct their deals, but also takes a passive part in them as a trusted third-party intermediary.
Centralized exchanges are traditionally custodial, meaning that after their customers deposit their cryptocurrencies onto an exchange account, the latter holds those funds for them. The “coins” that are being exchanged between the buyers and sellers are actually IOUs that are tracked internally by the centralized authority of an exchange, and they are only converted back into actual cryptocurrencies when a user decides to withdraw their funds.
On a decentralized exchange, on the other hand, there is no central agent to hold customers’ funds or track IOUs. Instead, they merely serve as a place for a buyer and a seller to meet and exchange their cryptocurrencies or crypto tokens. This peer-to-peer trading is fully automated and decentralized on DEXs, and the exchange of coins happens immediately and directly.
Why Do People Use Decentralized Exchanges?
The first and foremost reason for people to use decentralized exchanges is that they can maintain complete agency over their funds, which in turn allows for a number of advantages. The exchange is unable to freeze, lose or manipulate the users’ cryptocurrency for any reason — be it policy, incompetence or malice.
In addition, the lack of central storage for customer funds deprives potential hackers of an easy target. Malicious attacks are a major problem for centralized exchanges: in 2019 alone, hackers have managed to steal over $292 million worth of customers’ cryptocurrencies in 12 major attacks.
Another advantage of DEXs is their anonymity. Centralized exchanges are operated by companies, which are required by law to acquire industry-appropriate licensing and maintain Know Your Customer (KYC) guidelines, forcing their customers to disclose personal data before they can access the exchange. Conversely, decentralized exchanges allow their users to enjoy the right to privacy and remain completely anonymous.
Lastly, decentralized exchanges’ operations are maintained via a distributed network of nodes, unlike their centralized counterparts, which are hosted on company servers. As a result, the former are less prone to server downtime.
What Are the Main Decentralized Exchanges?
Some of the major decentralized exchanges available today include:
IDEX — one of the largest options available on the market with over $1.5 million in trading volume and around 400 hundred trading pairs. However, it is not a truly decentralized exchange, as it still retains some qualities of traditional, centralized exchanges, such as a KYC policy. Bancor — one of its unique features is the users’ ability to sell and buy cryptocurrencies without a third party by exchanging them for the platform’s native BNT token. This helps Bancor increase the liquidity of its markets — low liquidity often being a key bottleneck for decentralized exchanges. Binance DEX — a decentralized exchange that was created by Binance, which also operates one of the largest centralized exchanges on the crypto market by trading volume.
What Are Normal Fees for Decentralized Exchanges?
Trading fees vary significantly between different decentralized exchanges, but overall they are fairly similar to their centralized counterparts and are in the range of 0.1-0.3%.
How Secure Are Decentralized Exchanges?
Owing to the fact that they don’t hold customers’ funds, DEXs are significantly less susceptible to security breaches than centralized exchanges. However, different platforms maintain different degrees of decentralization, which means that they are still vulnerable to different extents. As an example, in 2018 hackers exploited a vulnerability in Bancor’s wallet that was used to temporarily hold customers’ funds and made off with $23.5 million worth of crypto.