What are ‘Decentralized Exchanges’ and How are They Different?
“Decentralized” is one of the most common words we hear all the time in the cryptocurrency world. Sure, we all that it means just what it sounds like: not centralized. But how often do we actually use decentralized applications and systems and what are our options if we want to? Today, let’s take a look at one of the newer options for investors: decentralized exchanges. Decentralized exchanges, also referred to as “DEXs,” are a new area for the cryptoworld. Even though it’s new, they’re definitely one of the most important changes to watch for this year.
Decentralized Exchanges vs Centralized Exchanges
Both decentralized exchanges and regular (centralized) exchanges accomplish the same thing. For both of them, the goal is to facilitate the trading of different assets. In the cryptoworld, that means we’re trading cryptocurrencies for other cryptocurrencies or sometimes even fiat currency (US dollar, euro, etc.). The central goal and idea for both of them is exactly the same, but they differ in how they accomplish that goal.
While a regular exchange runs in a centralized manner, controlled by one large entity, a decentralized exchange is just the opposite. Let’s take a look at both and some examples of each.
Centralized exchanges are the ones most of us are already likely quite familiar with. Big-name exchanges like Coinbase (and GDAX), Binance, Bittrex, and Poloniex are all examples of centralized exchanges.
All this really means is that the exchanges themselves are owned, operated, and secured by one central entity. Unlike something blockchain-based, these exchanges operate in a more traditional manner. Because of the centralization in nature, users are forced to hand over a significant amount of trust over to the entity running the exchange.
The cryptocurrencies traders store on exchanges are actually detached from the traders because they don’t have access to their private keys. Sure, there is security in place to protect the funds stored online, but it’s not the same as having your assets in a personal wallet.
On the other side of things are the decentralized exchanges. You may have heard of some of them before. Exchanges like Waves, 0x, EtherDelta, and OpenLedger are some of the most commonly used ones. These differ significantly from centralized exchanges because they do not rely on a third party. Users don’t need to hand over their information to another entity. Instead, traders interact directly with each other when trading cryptocurrencies.
A big plus for decentralized exchanges is the lack of authority governing them. Now this doesn’t mean that they’re the Wild West of the trading world, but it does mean that a group of bad actors can’t “hack” the exchange. Decentralized exchanges put the power back into the hands of the traders involved and minimize some of the risk incurred.
However, we should note that there are some drawbacks as well. Currently, the biggest real drawback for decentralized exchanges is simply the user experience. They’re certainly not impossible to use and learn, but they’re a little clunkier than centralized exchanges.
This is mainly because they’re not as popular yet. Most newcomers to the cryptomarkets are generally using centralized exchanges for their ease of use. If you take a look at some of the examples listed above, Coinbase is a little easier to figure out than EtherDelta if you’re a newcomer to the cryptoworld.
The Future of Decentralization
Even though they’re not as common now, the future of decentralized exchanges is likely to change. Many involved in the cryptospace are now putting the focus back on decentralization and away from centralized systems.
Not too long ago, the largest cryptocurrency exchange in the game, Binance, announced that it’s working on a decentralized exchange of their own. The new exchange, set to be released at some point this year, is to be called “Binance Chain” and is intended to help solve many of the traditional issues that have plagued decentralized exchanges.
Even if they’re not the most used exchanges now, DEXs are certainly something worth keeping an eye on for the future.