When looking to trade cryptocurrencies, one most often needs to use an exchange to do so. However, did you know that there are two types of exchanges? Centralized ones, where you are not in full control of your own crypto, and Decentralized ones — also known as a DEX.
Most likely, you'll find yourself using a crypto exchange to get your very first Bitcoin or other crypto of your choosing. After this, that crypto exchange can still be pretty useful — you can trade one digital asset for another there. However, did you know that the crypto you keep on an exchange is actually not in your control?
The exchange holds a vital piece of data: your Private Key. Remember the famous crypto saying “Not your keys, not your coins”? Since the exchange holds your key, they own your crypto and have control over it. Also, centralized exchanges are a single target for hackers — and we've seen several of them hacked for hundreds of millions of dollars over the years.
That's where Decentralized Exchanges come in.
What Is a Decentralized Exchange (DEX)?
A decentralized exchange — or DEX — is an exchange where YOU hold your keys. With a DEX, you actually hold the Private Key. This means you remain in total control of your own crypto, and you decide how its security is handled. Also, that single point of failure found in normal exchanges? A DEX doesn't have that: everyone keeps their own keys, so the wealth is completely dispersed. It is decentralized.
What Is a DEX For?
With centralized crypto exchanges, you have to make an account to log in and use their services. With a DEX, your Private Key counts as your login. Once you log in with your Private Key, you'll immediately see your crypto balances. You won't have to provide any personal information — great for those who value their privacy.
Benefits of Decentralized Exchanges
Traditional crypto exchanges handle the swap of one digital currency for another for you. A DEX works differently — it's purely peer-to-peer. The platform is there to help you trade your crypto directly with someone else, rather than getting involved in the trade itself. This brings two key advantages:
- You don't need to trust anyone for the trade to take place.
- The fees paid for the trade are usually lower than with normal exchanges.
- You are completely in control of your crypto security — you don't have to entrust it to someone else.
Risks of Decentralized Exchanges
A DEX is an amazing tool for trading, but it doesn't allow you to buy cryptocurrencies with Euros or US Dollars. Decentralized exchanges only provide the option to trade existing crypto assets — not to purchase them with fiat currency.
Being in charge of the security of your private keys can be an amazing thing, but it also means you are completely responsible for it. Most DEX methods require you to enter your private keys on a computer or smartphone, making them vulnerable to online attacks.
The best and easiest way to secure your private keys is with a hardware wallet.
Additionally, a DEX is pretty different to use compared to usual exchanges. It's not as simple as logging in and clicking two buttons to trade. Due to its complexity, it's more suited for advanced users, and the assets you can trade are sometimes limited. That said, a DEX can be a powerful tool to diversify your crypto portfolio while maintaining ownership and privacy.