The Benefits of Adopting a Decentralized Exchange

There are two different types of cryptocurrency exchanges, centralized and decentralized exchanges, often referred to as CEX and DEX respectively. In this post, we explore the pros and cons of each, and the risks associated while trading on either.

CEX vs DEX: What’s the Difference?

Centralized exchanges like Binance or Coinbase are some of the popular first choices for beginners just starting their crypto journey. Centralized exchanges act as an intermediary between buyers and sellers, and each transaction goes through security through a centralized server, verifying the data before confirming the transaction.

Trades occur through a system called “order book”. In this system, the exchange matches buy and sell orders from its users; this order book system means that the liquidity of a centralized exchange is correlated with the number of buy and sell orders.

Decentralized exchanges like BOTSwap, Uniswap, and PancakeSwap are a few of the most recommended options when it comes to both developers and traders. Decentralized exchanges function independently of any third party. In fact, they function quite similarly to peer-to-peer networks.

Some of the older DEXs, such as LoopRing and IDEX work using a decentralized version of the order book system found in centralized exchanges. Instead of a central server, they use an algorithm to find and match trades between buyers and sellers, while smart contracts record the exchange on the blockchain to reflect the assets changing hands.

The newer generation of DEXs like BOTSwap is also known as Automated Market Makers, or AMM for short. This system was developed due to the challenge faced by the order book system when working with decentralized exchanges, namely lack of liquidity. Instead of matching buyers and sellers, AMM DEXs carry out transactions via liquidity pools managed by DEX’s own smart contract. The liquidity is provided by users who give their tokens as a part of yield farming strategies.

Now that the basic workings of each type are known, let’s study the differences in detail.

Ownership of Assets

As a rule, centralized exchanges require you to store your assets in their wallets, and the wallet keys are also kept by the exchange. This security flaw is a tradeoff for greater ease and accessibility. Before using a centralized exchange, be aware that if the exchange gets hacked, you stand to lose all your assets held in the exchange’s wallet.

DEXs do not require you to store your assets with them, rather the opposite. You are supposed to connect a private wallet such as Breadwallet, BOT Wallet, etc., to the exchange and trade. This allows you to keep your tokens with yourself, reducing security risks and giving complete ownership to you.

Listed Coins

Centralized exchanges have a fewer variety of coins available for trade and purchase. This is caused by the stringent requirements many CEXs have to allow a specific cryptocurrency on their platform. This limits your ability to diversify your portfolio substantially, especially when it comes to meme coins with high potential.

Decentralized exchanges have next to no verification requirements, which gives you access to a multitude of tokens you wouldn’t be able to access through a CEX. Buying coins before they reach the wider markets on a CEX gives you the added advantage of being an early adopter, providing you with greater profit margins.

Commissions & Fees

While trading crypto, each transaction comes with a certain percentage of fees. When trading on a CEX, the fees can range from 5 to 10%, which is understandably a very steep fee. On a DEX, the fees are negligible in comparison, either absent or somewhere around ~1%. This is due to the absence of third parties with a profit motive.

Privacy Protections

Since centralized exchanges handle fiat money, they come under regulation by the central governments of countries. Due to this regulation, they require government-issued IDs as a Know-Your-Customer or KYC policy, before they allow their users to trade crypto freely.

Since DEXs don’t primarily deal with fiat, they are unregulated and allow users to trade on the exchange without any need for identification, generating an additional layer of security and privacy not found with CEXs.

Availability

With centralized exchanges, there’s a chance of servers crashing and losing your data, and by extension, your tokens. This situation has occurred before in May of 2021, when Binance and Coinbase went temporarily offline, sending Bitcoin’s value tumbling.

When using a decentralized exchange, the possibility of server crashing becomes minimal due to the absence of a middleman hosting the network. As a peer-to-peer network, DEXs are available for use 24/7.

Which DEX is the Best Option?

BOTSwap is a newcomer to the crypto economy, but its ambitious offerings are nonetheless a sight to behold. Apart from the traditional features provided by most other decentralized exchanges, it is a multichain exchange. Meaning, even though it’s built on the BSC chain it can connect to other chains, such as Ethereum, Bitcoin, etc. This allows it to give you, the user, access to almost every coin built on the main blockchains.

This reduces the risk of losing access to any part of your portfolio, and eliminates the need for registering to multiple exchanges since BOTSwap by itself gives you access to each and every coin regardless of the parent chain it’s based on.

Conclusion

As we can see, the advantages of using a DEX far outweigh the ease of access provided by a centralized exchange. Better privacy, diverse options, lower commissions, and more put decentralized exchanges as the front runner in the competition between the two models.