If you’ve used centralized exchanges like Binance and Coinbase, you’ll probably find it easy to navigate decentralized exchanges. Although centralized and decentralized crypto exchanges are entirely different, you will see lots of similar features, such as the pages where cryptocurrencies are displayed, charts where you can see the current prices, account settings, etc.
Now, if this is your first time getting into more details about decentralized exchanges, you’ll learn more about these platforms in this article. Let’s start by providing a quick overview of decentralized exchanges.
What are decentralized crypto exchanges?
Decentralized crypto exchanges are basically platforms where you can buy and sell cryptocurrencies. On top of that, you can also swap crypto from one token to another as you wish. So, if you want to convert your BTC to USDT, for example, you can easily do so on decentralized platforms. Also, there are additional features like staking, farming, providing liquidity, and lending. The services of a decentralized platform will depend on its capability. If you want to try more features other than buying and selling crypto, you should check what the platform is offering first to find the right one-stop-shop website for you.
How are decentralized exchanges different from centralized ones?
You might also be curious about what makes decentralized exchanges different from platforms like Binance and Coinbase. The main difference is that decentralized platforms are built on blockchain, which means no one controls the transactions and records. This also means that users are freer to make transactions as they wish.
Decentralized exchanges rely on liquidity pools, unlike centralized exchanges, where they need humans to initiate transactions when someone buys or sells cryptocurrencies. For instance, Binance has merchants who complete the transactions, and the prices of tokens will depend on how much merchants bid at the moment, which can be a bit higher or lower than the current market price.
In decentralized exchanges, users can buy or sell tokens at the current market price since transactions will automatically get completed once placed. There won’t be an issue as long as the liquidity pool is enough for specific tokens. This also explains why decentralized exchanges are often called “automated money makers.”
How do decentralized exchanges work?
Decentralized exchanges have liquidity funds reserved for specific tokens as automated money makers. More often than not, all tokens listed on these platforms have liquidity pools where the funds are taken from whenever a user buys, sells, or swaps cryptocurrencies. The funds in liquidity pools are provided by users too. Anyone can provide liquidity in exchange for rewards. The rate will depend on the current APR offered by decentralized exchanges.
Users who provide liquidity are called “LPs” or short for “liquidity providers.” Aside from the rewards they get from their contributions to the pool, they also receive LP tokens, which they can use to avail themselves of the other services offered by decentralized platforms. So, users who want to use these exchanges to get their cryptocurrencies can also earn extra tokens just by participating in the platforms’ services and projects.
On the flip side of the coin, users who just want to avail of the services offered by decentralized platforms must ensure that they have a crypto wallet. The wallet needs to be connected to the platform to ensure that what users buy and sell is reflected in their accounts.
The websites are pretty easy to navigate if you’ve used other blockchain platforms before. The trickiest part, though, is when you explore these sites for the first time. So, it’s recommended that you get familiar with crypto wallets, centralized exchanges, and other crypto-related things before you deep dive into other websites.
Who should use decentralized exchanges?
Finding the right decentralized exchange, connecting your crypto wallet, choosing which rewarding projects you want to be part of, and eventually earning from those projects. This is basically the process of using a decentralized platform for your cryptocurrencies.
As you’ve read above, these platforms are for everyone who wants to buy, sell, and swap cryptocurrencies. What makes decentralized exchanges better is that you don’t have to wait for a merchant to complete your transaction. With the reserved funds in liquidity pools, you can sell or purchase your cryptocurrencies in real-time at the current market price.
Decentralized exchanges are also for those seeking extra income in the blockchain space. If you are not doing crypto trading or investing full-time, staking and providing liquidity might suit you. These activities are less risky than crypto trading, and even if you don’t have enough experience as a crypto trader, you can still participate to earn more cryptocurrencies.
Examples of decentralized crypto exchanges
Some of the notable decentralized crypto exchanges in the market today are Uniswap, PancakeSwap, SushiSwap, and Raydium. You can start exploring them and see which one is the most suitable for you. Just keep in mind that they are built on different blockchain networks. Uniswap, for example, is built on Ethereum, while PancakeSwap is on Binance Smart Chain. By knowing these things, you would know what tokens you can easily trade and what services you can avail of for better earnings.
As a final note, decentralized exchanges are great if you are looking for faster DeFi platforms where you can do crypto transactions smoother. You can buy, sell, swap, transfer, and even deposit cryptocurrencies as you want. But then, you have to be careful when using any platform where you need to connect your crypto wallet. You have to do a background check on the decentralized exchange first, especially if it’s new and doesn’t have a track record in the market. And even if the platform is already established, you have to keep digging into the services they offer, especially in terms of providing liquidity. You should choose a liquidity pool with more participants to ensure your crypto rewards.