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What Are the Top 3 Things People Get Wrong About DEXs?

Even before November’s FTX debacle, which pushed a record number of investors to decentralized solutions, Decentralized Exchanges (DEXs) were carving out a tidy place for themselves in the centralized exchanges-dominated marketplace.

A research report co-authored in May by Uniswap and Paradigm, a crypto-focused VC firm, showed that Uniswap, the biggest decentralized exchange, had deeper liquidity in several trading pairs — including ETH/USD, than either Binance or Coinbase.

The report pointed to the possibility of DEXs taking on their bigger competitors in the future thanks to their ability to “deliver higher liquidity than centralized exchanges” with automated market makers (AMM).

Also, Citigroup reported this October that DEXs have outpaced CEXs in growth in the last two years.

This year’s failures of centralized crypto platforms, such as Voyager Digital, Celsius, and FTX, helped push DEXs further to the center stage.

More crypto investors will likely want to look into DEXs in the coming months and years.

To help our readers on that journey, we made a list of the top three things people get wrong about DEXs.

An example of a dex

Misconception #1. DEXs Are 100% Bulletproof

One of decentralized exchanges’ selling points is that at no point do they take custody of user funds. That makes it impossible for bad actors to infiltrate an exchange and pilfer customer funds.

DEXs live up to the “Not your keys, not your coins” mantra, which cautions crypto investors against storing their crypto in centralized exchanges. Essentially, there’s no knowing what’ll happen to your crypto in CEXs.

As is evident from the FTX collapse and other crypto bankruptcies this year, an exchange can run into liquidity issues and render customers unable to get out their money.

But also, decentralized exchanges are only as strong as their smart contracts. A poorly developed code could provide a loophole for hackers to exploit. As such, it’s wise to do your research before settling for any DEX.

DEXs’ non-custodial storage is supposed to give users more control over their funds. Yet, the practicalities of self-custody, such as 12-word backup phrases, private keys, and others, may appear intimidating to some users. Worse, if you forget your 12-word backup phrase, your money is gone forever.

With CEXs, crypto holders do not have to memorize a passcode, recovery phrases, etc. But you don’t know whether your funds are secure. With DEXs, you’re fully in charge of your crypto, while still relying on the smart contract being foolproof.

Misconception #2. DEX Transactions Are Untraceable 

Due to the perception that blockchain transactions are anonymous, there is a misunderstanding that transactions on DEXs follow suit. That perception is reinforced by DEXs not requiring you to submit Know Your Customer (KYC) information.

However, identities of users of public blockchains, such as Bitcoin and Ethereum, can be learned by tying KYC data to addresses on blockchains. When someone withdraws cryptocurrency from an exchange where they’ve submitted KYC, to a wallet they control, they’ve doxxed that address. Any trades made on a DEX with that address can reliably be tied to a user’s identity.

One way to obscure your transactions is to use a different address each time you transact crypto. You might also have several wallets for various purposes. The goal is to make it harder for your transactions to be linked to one another.

Misconception #3. DEXs Are Only For Experienced Traders 

On the surface, DEXs can seem intimidating. Remember, your funds aren’t stored on the exchange — so you don’t just log in and get to trading a la CEXs. The way to access DEXs is through a crypto wallet compatible with smart contracts, e.g., Metamask for Ethereum.

Since DEXs are based on the blockchain, you have to fund your wallet with the specific token for that blockchain.

When using DEXs, you also have to know how to adjust for slippage. Slippage is the difference in price between when you initiated a trade and when you completed it.

Slippages occur due to market movements that happen between the time you began and the time you completed a trade.

Sometimes a slippage can work in your favor. Other times, not so much. As such, you often have to manually adjust for slippage when using a DEX. That process can be technical and daunting.

So, DEX trading can seem tailored for experienced traders only. But beginner traders should know that experienced traders were once there. The best way to beat your nerves about using a DEX is to get out there and start using one. Over time, it becomes second nature.

How Do DEXs Work?

DEXs have the same goals as centralized exchanges (CEXs), but there isn’t an intermediary this time. Instead, a DEX relies on smart contracts to execute transactions.

In a CEX, traders rely on the company to store their crypto and facilitate transactions/trades with other users. On a DEX, transactions are purely peer-to-peer, which makes them “disintermediated” and “trustless.”

Here are other defining features of DEXs:

  • Built on the blockchain and are decentralized autonomous organizations (DAOs)
  • Users do not give up custody.
  • The use of liquidity pools. Liquidity pools are crowdsourced crypto reservoirs that facilitate peer-to-peer trades, yield farming, and other DeFi functions. Users who contribute to liquidity pools are rewarded with transaction fees, profit from yield farming, and so on. Liquidity pools are the lifeline of DEXs.
  • Liquidity pools employ Automated Market Makers, which are protocols that automatically execute buy and sell orders on a DEX.

Some of the most popular DEXs include Uniswap, PancakeSwap, SushiSwap, Kyber, 1inch and Bancor. Uniswap is currently the most dominant DEX, commanding over 50% of the market share.

Decentralized exchanges will increasingly be more relevant. Their centralized counterparts have played a crucial role in onboarding millions of people into crypto, but investors who desire more liberty over their crypto assets will migrate to DEXs.

Hopefully, this piece dispels any misconceptions you’ve had about them.

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Hope Mutie

About the Author

Hope Mutie

Hope Mutie is a professional writer and editor whose interests include fintech, cryptocurrency, and blockchain. She engages with crypto audiences by curating content that’s fun-to-read, educational, and offers unmatched value. Hope is part of the brilliant team at Go Full Crypto – a podcast and service that enables your transition into crypto.

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