Business Without Middlemen: A Beginner’s Guide To Decentralised Exchanges

One of the key trends of the rapidly evolving cryptocurrency trading market is its gradual shift to decentralized exchanges (DEX). These platforms provide services for cryptocurrency trading, yet contrary to traditional exchanges, all the transactions are handled directly between two users, and no banking institutions or other parties are involved. This innovative approach to trading operations not only increases financial freedom but makes trades more accessible and beneficial. Nonetheless, despite numerous advantages, crypto decentralized exchange platforms do possess their specifics that you have to be aware of before getting started.

What is a crypto decentralized exchange platforms (DEX)?

The operation of a crypto decentralized exchange is based on the implementation of smart contracts, allowing users to have direct interaction with other participants, and no intermediaries are involved in the process in any way. In contrast to centralized exchanges, DEX platforms do not require users to deposit the assets, thus totally eliminating the risk of fund freezing, issues related to withdrawal or money loss due to cyber-attacks.

The transactions are executed through blockchain and decentralized liquidity mechanisms, like AMMs – Automated Market Makers. These trading algorithms enable digital asset exchanges without using a standard order book system substituting it with liquidity pools with funds contributed by users.

Advantages of a crypto decentralized exchange

• No third parties involved

With no intermediaries, users have full control over their funds, and transactions are made from personal digital wallets, thus minimizing the risk of fund loss due to various reasons like hacker attacks, bankruptcy or sudden sanctions on international transfers.

• Enhanced security

You will be surprised to learn how often centralized exchanges experience cyber-attacks, as they tend to keep large sums of money or digital assets on their servers. Operating on DEX, the risks are reduced to a minimum, as all the assets are safely stored in personal wallets while transactions are handled through smart contracts.

• Accessibility and anonymity

Many crypto decentralized exchange platforms do not require to undergo the process of KYC – Know Your Customer – making them more appealing to those users, who value their privacy. Access to crypto decentralized exchnage platforms can be performed from any part of the globe, with no limitations related to legal requirements.

Global liquidity and decentralization

By integrating with multiple blockchains and cross-chain protocols, decentralized exchanges enable trading transactions not available on traditional exchanges, providing a much wider choice of digital tools.

Drawbacks and challenges of  crypto decentralized exchange platforms

• Complex interface and high responsibility level

Unlike centralized exchanges, working with a crypto decentralized exchange platform requires at least a general comprehension of blockchain, digital wallet and smart-contract operational principles, as well as necessary safety precautions that have to be considered. Even the tiniest human error and misspelling of one character when sending crypto assets, may lead to them being lost with no possibility to retrieve.

• Smart-contract risks

Even though crypto decentralized exchange platforms eliminate the need for a financial institution to be involved, their seamless functioning largely depends on the reliability of smart contracts. Bugs in code or other vulnerabilities can be exploited by hackers with the aim of stealing funds or manipulating liquidity.

• Limited speed and high commissions

DEX are operating on the blockchain base, making them reliant on the network’s bandwidth and scalability. During periods of higher load, fees can grow substantially, reducing the transaction cost efficiency.

How to start trading on a crypto decentralized exchange platform?

• The selection and setting up of a digital crypto wallet

If you want to start trading assets on DEX platforms, you are required to have a digital wallet address that supports interaction with blockchain protocols. When choosing a wallet, consider its compatibility with the proper network, implemented security measures and the flexibility to modify extra features like hardware protection or backup.

• Depositing crypto into the wallet and choosing the network

Before trading, you have to fill your wallet with the assets you are willing to trade. Additionally, always check beforehand whether the selected crypto decentralized exchange platform supports the blockchain standard and which token it requires to pay the transaction fees.

• Connecting and configuring the parameters of the exchange

You can connect directly to the exchange either through a browser or via a mobile application. Then the trading process goes as follows: you select the trading pair, set the necessary exchange parameters and verify the amount of applicable commissions.

Market conditions and liquidity assessment

Never forget to spend time analyzing the market conditions to prevent unfavorable price slippage, which sometimes can be caused by low liquidity.

Executing and monitoring the transaction

After setting up the exchange parameters, it is required to confirm the transaction by signing it in the digital wallet. The blockchain processing time is crucial, as delays can have an impact on the final price of the transaction.

Security monitoring and asset management

Once a transaction is successful, it is well worth checking your wallet balance regularly, administering private keys, and employing additional security measures like multi-signature.

What does the future hold for decentralized exchanges?

DeFi or Decentralized Finance Technologies (DeFi) continue to develop and offer new liquidity models as well as improved security mechanisms. Consequently, in the future, crypto decentralized exchange platforms can become the primary and most common way to trade crypto assets. Even though there are some current limitations, decentralized exchanges already symbolize an encouraging alternative to traditional platforms, providing users with more freedom, security and full control over their finances.