Since the introduction of digital currencies, users of crypto exchanges have encountered ongoing problems with exchanges, such as hacks, loss of funds, and irresponsible owners. For example, in the first seven months of 2019, there were seven large-scale attacks on exchanges, resulting in a loss of tens of millions of dollars.
Such issues have resulted in the increased popularity of decentralized exchanges (DEXs), which present a stronger competitive edge over centralized exchanges (CEXs). Before diving into the three main reasons, you should use a DEX, let us briefly look at the difference between a DEX and a CEX.
DEX Vs. CEX
A CEX operates just like a bank. You deposit your digital assets, and the exchange acts as a custodian. It is up to the exchange to safeguard the funds and ensure they are available when you need them.
On the other hand, a DEX never takes custody of user funds. The underlying mechanisms for a DEX can vary. But generally, there is an order matching protocol, and funds are transferred between individual wallets with the help of smart contracts that perform trades automatically.
Three Reasons Why You Should Use a DEX
CEXs hold large amounts of user funds at a central point, making hackers quickly attack them. In 2015, Bistamp, a Slovenia-based exchange, experienced a cybersecurity attack resulting in a loss of 19,000 Bitcoins. The most famous crypto hack in history was Mt. Gox, a CEX that no longer exists. It experienced two attacks in 2011 and 2014, resulting in a loss of over 750,000 Bitcoins.
Since DEXs do not store user funds like CEXs, they eliminate the threat of a central point of attack, which hackers exploit.
Control over Your Funds
CEXs deny users complete control over their assets. This can bring many limitations and even financial losses to investors. In early 2019, HitBTC exchange froze some user accounts to curb a planned event by users withdrawing all their funds in one day. The event, known as “Proof of Keys,” was an attempt by crypto users to ensure that marketplaces make good on deposits, similar to a bank run.
The non-custodial nature of DEXs implies that funds are under your control. This means that there is no central authority that can freeze your funds, or it is not possible to lose your funds to them. Even if the exchange shuts down tomorrow, you will still remain with your funds. Generally, DEXs echo the original concept of Satoshi Nakamoto- decentralized the financial system.
Most regulators classify CEXs as money service providers (MSPs), implying that customers must undergo know-your-customer (KYC) and anti-money laundering (AML) checks. However, most people are reluctant to provide their private information to third parties since they lack control of their data.
Contrary to this, DEXs are not under any central control. This means that there are often no registration requirements for using the platform apart from connecting your wallet.
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