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What is decentralized exchange (DEX) and what is the difference from сentralised exchange (CEX)?

Decentralized exchanges (DEX) have gained popularity as an alternative to traditional centralized exchanges (CEX) for cryptocurrency trading. In contrast to CEX, DEX platforms offer decentralization and transaction anonymity, making them an attractive choice for many users. However, newcomers to the world of cryptocurrency may find DEX confusing due to the non-user-friendly interface and the need to use third-party services such as wallets.

To help you navigate the nuances of DEX and start using them safely, read our guide. We will explain how decentralized exchanges work, how they differ from centralized exchanges (CEX) and how to start using them safely.

What is DEX and how it works

A Decentralized Exchange (DEX) is like an online marketplace where people trade cryptocurrencies. But instead of being run by one company, it's powered by computer programs called «smart contracts». These smart contracts make sure trades happen fairly and securely, without any middlemen. This makes DEXs more transparent, secure, and gives traders more control over their money.

DEX, with its decentralized approach and smart contracts, offers several key conveniences that differentiate it from CEX:

Full control of funds. With DEX, you always remain in control of your funds. Unlike centralized exchanges, where you have to trust a third party with your assets, DEX allows you to retain ownership of your funds throughout the entire trading process.
No KYC requirements. Know Your Customer (KYC) rules have become а common practice on centralized exchanges. These rules require users to provide personal information and go through a verification process before they can start trading. However, with a DEX, users do not have to provide their personal data — instead, they can simply log in to the service through their crypto wallet.
Easier way to exchange funds. DEX platforms have a different structure compared to centralized exchanges. They use liquidity pools and automated market-making algorithms instead of complex order books and trading algorithms. This makes it easier for users to understand how to exchange their cryptocurrencies.

DEX can be incredibly useful for users because it enables automated and secure transactions without the need for intermediaries

Advantages of DEX

Above, we have already discussed the advantages of DEX over CEX, which make them attractive to many cryptocurrency traders. Here are a few more:

✅ Increased security. One of the most significant advantages of DEX is the enhanced security they offer. Unlike centralized exchanges, where users' funds are stored in a central vault, DEX allows users to keep their funds in their own wallets. This eliminates the risk of losing funds due to a security breach or hacking of a centralized exchange.
✅ Maintaining confidentiality. By facilitating direct exchanges between wallets, traders can buy and sell cryptocurrencies without revealing any sensitive information or their true identity. This means that transactions conducted on the DEX platform remain completely private, providing users with an added layer of security and reassurance.
✅ Accessibility. Unlike centralized exchanges, DEX platforms are truly decentralized and cannot restrict users in any way. This means that anyone with an internet connection can easily access DEX platforms from anywhere in the world, without facing any geographic limitations or restrictions. With this high level of accessibility, users can seamlessly trade cryptocurrencies and enjoy a truly borderless experience.
✅ Greater control over funds. Decentralized exchanges provide users with full control over their funds and assets. Customers have complete access to their private keys, and no one can freeze their accounts or restrict access to funds.

DEX operates without intermediaries, which eliminates the need for brokers, reduces trading fees significantly, and increases transparency.

Disadvantages of DEX

In contrast to their centralized counterparts, it is important to note some of the disadvantages of decentralized exchanges.

Low liquidity. This can be a significant drawback of DEX. With fewer buyers and sellers, it can be challenging to find suitable trades. If supply is limited, this can result in less favorable prices for users.

Slow transaction speed. Transactions on DEX are recorded on the blockchain and require network confirmation, which can cause delays, especially when compared to CEX. This issue may become particularly relevant during periods of high network congestion or sudden spikes in trading activity. However, blockchain developers are currently working to increase transaction speeds, so this problem may be less prevalent over time.

Network interoperability. It presents another challenge for DEX as they operate on different blockchain networks. This means that the available cryptocurrencies for exchange and fees may vary across different exchanges. This could potentially discourage casual users who do not understand the principles of compatibility across different blockchains.

High fees on the Ethereum network. Additionally, DEX platforms like Curve impose high fees on the Ethereum network for transactions and exchanges. While Ethereum is widely used and reliable, its high fees can make trading on DEX very expensive for individual retail traders.

Finally, DEX platforms typically offer a more limited selection of trading pairs compared to CEX. Unlike major centralized exchanges that provide nearly all popular cryptocurrencies for trading and swapping, DEX users may need to connect to multiple platforms to trade.

Users may find it difficult to know how different blockchains work together, but it's simpler to trade coins from a liquidity pool than to understand order book mechanics

Top popular DEX platforms

There are several hundred decentralized exchanges in various blockchain networks available in the market. We will discuss the three most popular ones.

Uniswap	Uniswap is a well-known decentralized exchange built on the Ethereum blockchain. It offers a simple and intuitive user interface, making it accessible to both beginners and experienced traders.The advantages of Uniswap include a wide selection of tokens available for trading, transparency, and an active community. As an Ethereum-based DEX, Uniswap is susceptible to network congestion during periods of high demand, which can result in slower transaction speeds and higher fees. Nonetheless, Uniswap offers support for several other networks, such as Arbitrum, Polygon, and BSC.
PancakeSwap	PancakeSwap is a decentralized exchange built on the Binance Smart Chain (BSC) blockchain. The exchange offers similar features to Uniswap but with lower transaction fees and faster confirmation times.PancakeSwap has gained popularity among users who seek low-cost transactions and the opportunity to earn through yield farming. The platform offers various tokens, including those integrated into the Binance Chain ecosystem. Recently, support for the Ethereum blockchain has been added to the platform, expanding the number of tokens available for trading. However, users may have to pay higher fees compared to BSC.
Curve	Curve is a decentralized finance platform that offers a simple way to trade cryptocurrencies. Specifically, it focuses on trading stablecoins, which are cryptocurrencies that have their value tied to a specific currency, like the US dollar. Although it initially specialized in stablecoins, it now also supports the exchange and trading of other cryptocurrencies, expanding its offerings to cater to a broader range of users.Additionally, Curve offers an opportunity for individuals to generate income by providing liquidity to the platform. By contributing their stablecoins to the liquidity pools, users can earn fees for their participation, acting as liquidity providers.

Legal status of DEX and its significance for standard user

When it comes to the legal status of DEX, it's important to know that many countries are unsure about how to regulate these platforms. The lack of clarity can be both good and bad for regular users. On one hand, people using decentralized exchanges can enjoy the benefits of anonymity and decentralization without restrictions. However, if they face any issues, they can't seek help from law enforcement agencies.

In the United States, DEX platforms may be regulated by authorities like the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), depending on the specific platform's characteristics. In Europe, the regulations for DEX are also unclear. While countries like Switzerland and Malta are crypto-friendly and supportive of DEX, other European countries, such as Iceland, have completely banned digital assets.

It's important to note that some countries have completely banned cryptocurrency trading within their borders. These countries include Ecuador, Nepal, Indonesia, Bangladesh, Vietnam, Bolivia, and Iceland. China has also imposed strict sanctions on cryptocurrency trading and mining in the past, despite having one of the world's largest cryptocurrency markets. Although China's government policy on digital assets has changed, there are still strict restrictions on cryptocurrency transactions in the country.

It's essential to remember that regulations can differ from country to country, and it's crucial to comply with the laws of your jurisdiction to avoid any potential legal problems.

How can one earn money from DEX

There are several ways to earn money on decentralized exchanges: trading, investing in tokens, and providing liquidity. The first two are suitable for advanced users who understand the cryptocurrency market. We will focus on the latter, as it is suitable even for newcomers to the DeFi space.

What is liquidity provision?

It involves depositing a pair of tokens into a liquidity pool and locking them for a fixed period of time. When you provide liquidity, you contribute your funds to a special pool. This pool acts as a shared balance that traders use to buy and sell cryptocurrencies. By supplying funds to liquidity pools on DEX, you become a liquidity provider. As a reward, you receive a portion of the trading fees generated by the DEX.

The user interface of DeFi applications often discourages newcomers as it can be challenging for them to understand how to use the platform safely and earn from liquidity provision.

DSF addresses the majority of these issues:

✅ Connecting to the platform can be done with just a few clicks.
✅ We handle high fees on the Ethereum network, enabling you to start earning with any amount.
✅ Easy deposit and withdrawal of funds.
✅ Secure: we collaborate with trusted platforms like Curve and Convex.

No more confusion or guesswork. Our platform streamlines yield generation, making it easy to earn more from your crypto. Don't wait, optimize your yields today! Try app.