Crypto trading involves the use of exchanges, and if you haven’t used one before, you’re going to need to sooner or later. There are two types of crypto exchanges though – centralized (CEX) and decentralized (DEX).
While you can use any of them for your trading needs, they come with some critical differences. Centralized exchanges have a central person that runs the exchange, while a decentralized exchange doesn’t.
From the name, decentralized exchanges work hand in hand with decentralized finance (DeFi). If you’re interested in trading or even just investing in DeFi, you may need to use a decentralized exchange.
However, using a DEX is slightly a bigger deal than using a CEX, and you need to know this if you’ll succeed in your DeFi journey. For a DEX, you’ll be in charge of your funds right in your wallet and there’s no one you can run to if anything goes wrong with your trade.
DEXs also use liquidity pools to facilitate crypto trading rather than order books as is the case of CEXs. These liquidity pools can be withdrawn by bad actors behind the platform in a situation called rug pull.
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As there are more risks associated with DEXs, it is advisable that you take your time to choose a good one when you want to trade. The following are some factors you should consider when making this critical decision.
As mentioned earlier, liquidity pools are used to facilitate crypto swapping on decentralized exchanges, just like order books on centralized exchanges. This goes to tell you how important liquidity pools are.
Therefore when choosing a DEX, make sure it is one that has deep liquidity available. If there’s low liquidity, you may do well at times of low activity but at times of high activity such as during a bull market, you may not be able to sell tokens you hold, just because there’s no liquidity on the other side of the trade.
Decentralized exchanges don’t have established, known team members like centralized exchanges do. Therefore the only way you Can determine the reliability of a DEX is through its reputation.
If you’re looking for a reliable DEX, it is advisable to go for one with an established history and reputation. These would typically be the earliest and most popular DEXs in the space, including Uniswap, Pancakeswap and the rest.
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If you choose a random DEX that was recently created, remember you can’t hold anyone responsible if anything goes wrong. The same thing applies to the prominent DEXs, but at least you know they’re not going anywhere.
Number of Available Assets
Another thing to look out for in a DEX you wish to use is the number of available assets on the platform. This is important because as a DeFi trader or investor, you need to have a wide variety of assets to choose from
Now, DEXs generally provide a long list of assets you can trade, but there’s a class of DEXs that provide even more. These are called automated market makers or more commonly AMMs.
If you’ve been in the crypto industry for a fair amount of time, you must have heard of them. They are also DEXs, but among other things provide many more options to traders compared to other DEXs.
This is because they naturally have more liquidity and make it possible for you to trade less popular DeFi assets that you will not be able to trade on other DEXs.
DEXs have several advantages such as low fees, but this directly depends on the blockchain upon which the DEX runs. For example, Ethereum is the most popular blockchain for DEXs, smart contracts and decentralized exchanges.
However, Ethereum fees can go out of control and become higher than the transaction amount you have in mind. This can leave you stranded until you lose the gains on your assets. Therefore choosing a DEX based on the blockchain is critical so that you’ll be able to afford the fees.
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