A decentralized exchange is a special kind of trading platform that only allows the trading of decentralized currencies (cryptocurrencies) such as Bitcoin. The need for decentralized exchanges arose from the fact that the existing centralized exchanges are not well-equipped for the trading of cryptocurrencies.

Crypto users who trade or try to trade on these old exchanges are finding several issues of reliability, privacy and relevance. Therefore, the developers of cryptocurrencies had to come up with an alternative that is fast, more secure and reliable. A decentralized exchange provides all these features along with many others. Since it is an exchange platform dedicated to cryptocurrencies, more investors are now choosing the decentralized alternative for their trading activities.

Problems with Centralized Exchanges

Cryptocurrencies are decentralized by nature. They are built to operate without a financial intermediary, thus removing the risk and cost involved with third-party help and increasing transparency and security of the blockchain transactions.

Most of the centralized exchanges that allow cryptocurrency trading are effectively causing a conflict with the basic nature of these crypto-coins that are designed be decentralized. Centralized exchanges are surrounded by many risks, including the loss of fund because of exchange hacks, lack of blockchain understanding of the exchange managers that may result in a loss for users, operational and transactional errors by exchange employees, financial mismanagement, regulation issues, etc.

In practice, many users who have traded their digital currencies with these centralized exchanges have occurred significant financial losses.

Exchange hacks are very common on a centralized platform where all the data of transactions and funds are stored in one place only. Many bitcoin exchanges are known to have been hacked only because of this inefficiency. Most of these centralized exchanges are still unable to prevent such cyber crimes or find a way to stop them.

The hack of Mt.Gox exchange in 2014, where the hackers stole around $460 million, is just an example of such crypto exchange hacks.

Because of the unregulated nature of these currencies, even the government and official institutions can’t provide much help if such an exchange is hacked. That means, you cannot do much except for hoping that the exchange itself will somehow recover from the loss and get you your money back, which is also unlikely.

Following the hack of Mt.Gox bitcoin exchange, several other centralized exchanges were hacked since then, including the latest hack of Coincheck exchange in 2018 in which $530 million worth of tokens were stolen by the hackers.

These hacking cases confirm one thing - centralized exchanges cannot be trusted with the security of cryptocurrencies. The existing crypto exchange model is too vulnerable.

Another major problem with these decentralized exchanges is that the user is not given the private keys of their exchange wallet accounts so that it is not very easy and usually time-consuming to transfer funds from/to these exchanges. This sometimes means that you might lose on important trading opportunities. The inability to constantly and instantly transfer funds from exchange wallets and back is an issue worth investigating.

Creating and verifying a new trading account on such exchanges is also a tedious process which requires users to go through a stringent KYC/AML procedure which is time-consuming.

There is a timely need for a solution that can make a better alternative to centralized exchanges for cryptocurrency trading.

Decentralized exchanges - A solution to drawbacks of centralized exchanges

Decentralized exchanges (DEX) are special exchanges for the trading of digital assets and currencies. They are based on the decentralized feature of the blockchain and thus provides a seamless way for the trading of major cryptocurrencies, and even some fiat currencies.

The best benefit of a decentralized exchange is that it doesn’t store any fund from its investors, but it only provides a platform for users to trade their digital assets with another user on the same exchange. The transaction occurs directly between two peers and is processed on the blockchain.

Since there are no intermediaries involved, this improves the security of the exchange as well as reduces the cost of transactions. As all the transactions are performed directly on a distributed ledger, the anonymity and financial security of the user is maintained. Most decentralized exchanges do not even require you to provide identity verification or other documentation, since all the transactions are automatically verified by the blockchain itself. The trading of cryptocurrencies on a DEX is simpler, cheaper and faster as there are no third-parties involved. Also, these exchanges are much secure and offer almost no potential attack vectors that hackers can exploit.

Another benefit is that many decentralized exchange platforms can be easily accessed with existing digital and hardware wallets since they have already integrated for the user benefit. That means anyone can purchase/sell cryptocurrencies by making payments from the available wallets. Since the wallet account is owned by the investor himself, he is in complete control of the encryption keys. This reduces the risk of any potential phishing attacks.

So, by now you must have understood why and how decentralized platforms are different and better than centralized exchanges. However, DEX is still a work in progress. Most of the existing decentralized exchanges are too complex to use for normal users, as they involve trading through smart contracts, which are not understandable by everyone. Even many tech-savvy investors find it difficult to trade on such platforms. This is why they are still dependent on centralized exchanges for their trading activities. However, we would like to alert all those investors who are still involved in crypto trading on centralized exchanges that this trading method is not at all secure and reliable.

As the world of blockchain evolves for the better, more decentralized exchanges with improved and complete features are expected to be launched eventually. The newer DEX platforms may soon enable users to participate in other trading activities such as stop-loss limits, margin trading and others that present exchanges do not allow, apart from the facility to trade one digital coin for another. The limited liquidity capability of the current DEX platforms is also expected to be dealt with in the coming time.

Medipedia is a blockchain-oriented healthcare service platform supported by MEP token which is a cryptocurrency with trading ability on external exchanges.