Decentralized exchanges facilitate cryptocurrency trading on a distributed ledger and do not hold personal data, account balances, portfolio allocation or fund positions of their customers.
Although DEXs are not a surefire way to absolve investors from criminal behavior, they do provide us with more control over our coins than their more centralized counterparts. With that in mind, let’s take a deeper look at what defines a decentralized exchange and the key considerations investors should take into account in choosing their preferred DEX.
How do DEXs work?
Decentralized exchanges use smart contracts to enable traders to exchange assets without the need for an intermediary. Meanwhile, the services offered by centralized exchanges can be compared to those available through banks. These centralized exchanges store our crypto in central locations and provide their own level of security and monitoring, helping to make it much easier to move coins around and exchange them within online platforms. Can
Due to its decentralized nature, DEXs allow users to trade directly from their wallets by implementing smart contracts behind the trading platform. This gives traders full responsibility over their crypto, and they only have themselves to blame should money end up in the wrong wallet or they lose their private keys.
Major decentralized exchanges are built directly on blockchains that support smart contracts. Generally using the wider Ethereum decentralized finance ecosystem, there is currently a wide range of exchanges that enable users to access countless crypto assets that their centralized counterparts do not have access to.
But which DEX best suits your needs? Let’s take a deeper look at five considerations investors should consider before choosing a decentralized exchange.
1. Evaluate Your Cryptocurrency Goals
While decentralized exchanges are great for providing a greater level of control over your cryptocurrency and can provide access to a far greater amount of assets in relation to centralized exchanges, it is important to note that they can be difficult for inexperienced traders. .
To start trading using DEX, you need to get hold of an external cryptocurrency wallet like MetaMask and link it to the DApp. While this process can be automated, it can also be tedious for users who are used to embedding their wallets in centralized exchanges.
With this in mind, if you are an investor who only wants to buy and hold bitcoin, it makes sense to embrace centralized exchanges and either keep your coins in their embedded wallets or transfer them to external wallets to hold them for the long term. Might be worth doing.
2. Consider the cryptocurrencies you want to exchange
While a DEX can empower traders to discover a large quantity of small-cap cryptocurrencies to exchange, options are limited to their respective liquidity pools. This means that some exchanges will have more options than others.
For example, Uniswap has around 5,500 tokens available for exchange, SushiSwap has over 1,400 tokens, and Pancake Swap only has 290 tokens.
Elsewhere, 1inch supports thousands of coins due to DEX crawling over 50 Ethereum liquidity sources to offer competitive trading rates, a huge asset for traders looking to access the largest possible pool of cryptocurrencies. Might be possible.
Before settling on a DEX, remember which coins you will most likely be exchanging and check to see which exchanges host them.
3. Understand your risk tolerance
Centralized exchanges typically go through a vetting process before listing new tokens for users to buy and trade. However, due to the decentralized nature of DEXs, it is possible for anyone to create a coin and buy it through a decentralized exchange open to individuals.
This makes DEX users more prone to rug-pulling, where a coin owner will open up his cryptocurrency for purchase before withdrawing his large stake in the asset—causing its value to crash.
Even if you’re happy with the coin you’ve researched and want to buy, it’s worth remembering that small-cap coins listed exclusively on the DEX are priced higher than their large-cap counterparts. There is a risk of higher volatility levels. This can make the coins risky to hold.
4. Consider User-Friendliness
Different exchanges have different interfaces and different levels of complexity. It is important to know the difference between Pancake Swap, 1 Inch, SushiSwap and Uniswap with respect to utility.
For new users, SushiSwap’s simplicity may be more appealing, although Uniswap has established itself as a market leader in the DEX landscape.
5. Weighing the Risks of Unverified Tokens
Finally, it is important to cover the dangers of unproven tokens being listed on DEXs. Because they are decentralized platforms, you are more likely to encounter a scam using a DEX due to the high amount of accessible cryptocurrencies available to buy throughout the ecosystem.
Whether it’s a copycat coin designed to fool investors into buying into a rug pull, or a Ponzi scheme that the owner paid a group of influencers to promote before pulling out their equity. Yes, you should be careful while using any DEX.
For many of us who worry about being scammed out of our money, it may be worth choosing a DEX that actively promotes crypto and blockchain literacy for its users.
While many DEXs have sought to introduce risk ratings before setting up a trade, such as Pancake Swap’s traffic-light risk rating system, users need to take more time to research before purchasing an asset.
Along with Pancake Swap’s useful risk alert system, DEXs such as SushiSwap, 1Inch, and Uniswap all have helpful blogs and guides listed on their respective websites to help users stay aware of any threats.
Interoperability is Rewarding
Many investors don’t just look for a preferred DEX and instead choose to link their wallet to the most useful exchange at the time that best suits their needs. This allows users to assess risks through pancake swaps, while continuing to exchange their crypto using Ethereum on alternative exchanges if required.
Whether you’re just taking your first steps in crypto or an experienced trader waiting for your third bull run, using a DEX can be a great way to keep your assets under control and overcome the security weaknesses of centralized exchanges. . Furthermore, with the right amount of research and access to an external wallet, using DEXes to create an exchange can be downright intuitive.