One can obtain cryptocurrency in various ways, the two most popular being mining and trading. With mining becoming less popular, most people now get cryptocurrency through trading.
To sell or buy cryptocurrency, you need a way to exchange fiat currency for your desired cryptocurrency. Exchange cryptocurrency for fiat currency, or to trade cryptocurrency tokens for other cryptocurrency tokens. These trades are facilitated by and through exchanges.
There are two types of exchanges: centralized and decentralized exchanges. This article will focus on decentralized exchanges, and explore their use. How to use them, and their benefits to traders or investors.
What are Decentralized Exchanges?
A decentralized exchange is a peer-to-peer cryptocurrency marketplace. Where traders transact between themselves without handing their funds to a custodian or intermediary or having them manage the funds. All transactions in a decentralized exchange use self-executing agreements called smart contracts. Which are pieces of code written in different programming languages.
Decentralized exchanges (DEXs) were established to eliminate the need for. An authority to oversee or authorize trades or transactions within a specific deal. Their peer-to-peer nature helps them directly connect sellers and buyers of different cryptocurrencies. Which can vary from one exchange to the next.
Decentralized Exchanges are Non-custodial
A significant difference between centralized and decentralized exchanges is that the latter is non-custodial. These exchanges allow users to keep their wallet’s private keys. Which is advanced encryption that enables users to access a specific wallet.
Keeping their private key means the user can access their wallet and crypto balance when they access a decentralized exchange. This arrangement is excellent for traders, investors, and users who prefer to keep their private information private.
How Decentralized Exchanges Work
DEXs are built on blockchains that support smart contracts, with Ethereum being the blockchain of choice for most exchanges. Users keep their funds in the blockchain under their chosen DEX. And must pay a transaction and trading fee every time they execute a trade.
Even though traders have to interact with the smart contracts within that DEX. They still get access to all the pair swaps the platform has to offer through their platform. Remember that decentralized exchanges only allow swaps between cryptocurrency tokens and do not accept fiat, while centralized exchanges do.
How to Use a Decentralized Exchange
Since decentralized exchanges allow traders or investors to use their private keys, they do not require signing up. All a user needs is a compatible wallet. It is best to use a decentralized exchange that accepts the most popular wallets to ensure you can trade there. For example, the Level App platform allows you to use Ledger, Trezor, Coinbase Wallet, and WalletConnect.
You can also install wallet extensions. Connect them to your wallet and then use them to sign in whenever you need. You will need a seed phrase or private key if you have a wallet or to create. A new one if you do not before connecting the wallet.
Additionally, some wallets have apps that allow you to interact with smart contracts.
Once you connect your wallet to the exchange, you must fund the deal with its native token. You will use this native token to pay transaction fees. You can buy these tokens on centralized exchanges using various payment options like debit cards and bank accounts.
Also, you will use the tokens you have as your balance to exchange the needed tickets.
Benefits of Decentralized Exchanges
The two most significant benefits of decentralized exchanges are privacy and security. DEXs allow users to retain control of their private keys and funds throughout the trading process. This reduces the risk of hacks and prevents the possibility of a single point of failure.
Centralized exchanges typically require users to undergo rigorous KYC (Know Your Customer) procedures. Since users must provide their details, this process can compromise user privacy. DEXs allow users to trade without revealing personal information, preserving their anonymity.
Decentralized exchanges also allow users to retain full ownership. Of their assets, meaning they always have complete control over their funds. This differs from centralized exchanges, where users must trust the business to hold and manage their assets properly.
Conclusion
Decentralized, peer-to-peer marketplaces have significant benefits compared to centralized exchanges. They are much easier to use, protect users’ privacy, are secure, and have no geographic restrictions. DEXs are also not controlled by a central authority, making them a better choice for some people than traditional options.