1. What is DEX?
DEX stands for Decentralized exchange, which is a blockchain-based exchange that does not store user funds and personal data on the server, but only serves as an infrastructure to match buyers and sellers who want to buy and sell digital assets. With the help of the matching engine, this transaction occurs directly between participants (peer-to-peer).
2. Advantages of DEX
Unlike centralized exchanges, which store and control customers' assets, decentralized exchanges do not control customers' assets. Instead, assets are stored in a distributed manner, usually by users or the exchange software itself. This way, there is no single entity that is the owner of all cryptocurrencies in the exchange, and the risk of loss is much lower.
It has two main features:
One is anonymity.
Using a centralized exchange only requires a public key. At the same time, some centralized exchange creators claim that they only release open source software and are not responsible for the community's use of the software, thus avoiding KYC and AML issues.
The second is security.
In the past 10 years, there have been more than 30 cases of centralized exchanges being hacked, such as Mt.Gox and Coincheck. Until now, hackers have never stopped trying to steal, and every day hackers are trying to find loopholes to invade centralized systems through various methods. Since decentralized exchanges exist in a computer network, it is more difficult to attack decentralized exchanges. There is no single point of entry or failure. This makes decentralized transactions safer.
3. Disadvantages of DEX
1. Low liquidity and trading depth.
Decentralized exchanges are still less popular than centralized exchanges. As a result, they have more customers, trading volume, and liquidity.
2. Lack of professional trading settings
Professional traders find it inconvenient to use decentralized exchanges due to the lack of advanced trading options. Algorithmic trading and high-frequency trading are very difficult in a distributed environment.
3. Lack of usability.
Using a decentralized exchange usually requires connecting to a DApp or even installing an offline decentralized exchange client. You may need to configure a separate node and stay online for a long time to complete the transaction.
4. The difference between DEX and centralized exchanges
The differences between centralized trading platforms and DEX are mainly reflected in the following aspects:
1. Different asset control rights
On centralized trading platforms, user assets are controlled by centralized trading platforms. Users need to recharge their assets to the wallet of the trading platform. The asset custody function of centralized trading platforms is like a bank. Users deposit money in the bank, and the bank gives the user an account to record the user's funds. The bank has absolute control over the user's funds.
In DEX, users’ assets are completely controlled by themselves. DEX does not provide fund custody services, so it cannot control or transfer users’ funds.
2. Different capital risks
The wallets of centralized trading platforms store the funds of all users. Due to the huge amount of funds, they are easily attacked by hackers. It is not uncommon for users to steal funds or even for trading platforms to run away.
Compared with the security risks of centralized trading platforms, which come from hacker attacks and platform absconding, almost all users will suffer losses once problems occur; the asset risks of DEX users mainly come from improper management of wallet private keys by users. The leakage of a user's private key will not affect the asset security of other users. The assets between users are completely isolated.
3. Different transparency of transactions
Transactions between users of centralized trading platforms are recorded by the trading platforms. Transaction information is only recorded in the internal ledger of the trading platform, not on the tamper-proof blockchain. Therefore, transactions on centralized trading platforms, also known as off-chain transactions, have relatively low transparency. If the trading platform wants to do evil, the cost of tampering with the transaction records is very low.
In DEX, transactions between users are completed on the blockchain, and their transactions will be packaged by miners and broadcast on the blockchain, so DEX transactions are also called on-chain transactions. Transaction information on the chain means that transaction information can be publicly queried on the blockchain and cannot be tampered with, so DEX transaction information is more secure and transparent.
4. Different trading experience
Centralized trading platforms, because transaction data is not on the chain, as long as there is a matching counterparty order, the transaction speed is extremely fast. At the same time, centralized trading platforms have simple operation steps, low usage thresholds, and can provide a variety of trading pairs, so more users will choose centralized trading platforms. More users mean better transaction depth, which further promotes the transaction speed of centralized trading platform orders.
Since transaction data on DEX needs to be uploaded to the chain, and the confirmation of transactions needs to wait for miners to package and broadcast, the transaction speed is slow. The operation steps of DEX are relatively complicated, and the threshold for use is higher. When it comes to transactions of different blockchain assets, such as Bitcoin and Ethereum transactions, more complex cross-chain technology is required, which many DEX trading platforms cannot achieve, so the supported transactions are fewer than those of centralized trading platforms.
Centralized trading platforms have faster transaction speeds, lower usage barriers, and better user experience than DEX.
