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I’ve covered a few decentralized exchanges in the past, but with everything that’s been happening with regulations and the popular U.S. exchanges, I think it’s important that everyone knows that number one: decentralized exchanges do exist
and number two: the basic concepts of how to use them. So today we’re going to explore how centralized exchanges are flawed, and how decentralized exchanges work.
So real quick, this is a little lesson for those of you who are new to crypto or who haven’t yet realized that there is indeed a need for decentralized exchanges.
All you hear in this land of cryptocurrency is the need for decentralization. This can be accomplished by the blockchains themselves if the team develops a distributed network of nodes and they work to eliminate bottlenecks within the network, in any form they may take.
One entity that in itself is a bottleneck, are centralized exchanges. Although these are popular with the crypto crowd and they make it easy for newcomers to buy, trade and store their cryptocurrency investments, these centralized exchanges defeat the whole purpose of cryptocurrency in the first place. As time goes on, the need for decentralized exchanges will be made all the more evident by the regulations that centralized exchanges are forced to abide by.
Centralized exchanges use centralized servers to store coins for hundreds of thousands of individuals. They also have a CEO which ultimately decides how your funds are handled within their exchange. Doesn’t quite sound like these qualities match up well with the idea for decentralized, peer-2-peer networks that Satoshi had envisioned for us.
If you’re coming to this realization and you’re interested in learning how you can still participate in the trading of cryptocurrencies without having to place your trust in a third party, that’s great, because there are other people who care about this as well, and they’ve developed decentralized exchanges to be used by anyone.
The basic concept behind decentralized exchanges is that they do not store your cryptocurrencies for you.
Here is a basic rundown of how these decentralized exchanges work.
There is no need to create any type of account, or provide any type of personal information or request any type of verification.Instead, you will connect a wallet of which you have complete control. If it’s a decentralized exchange, or “dex” for the Ethereum blockchain, then you’ll be using MyEtherWallet, MyCrypto, MetaMask, or a Ledger hardware wallet.
From there you will deposit whatever amount of coins you’d like to trade.
Once your deposit has gone through and is now on the exchange, you’re ready to begin trading.
If this DEX is designed for the Ethereum blockchain, like EtherDelta, or IDEX, then you’ll need to keep an amount of Ethereum in your actual wallet to account for the gas fees that will occur for each transaction. Meaning your deposit, your trades and your eventual withdrawal back into your wallet.
This is a very basic guide that I wanted to give you so you could get an idea of how the process generally works. For each decentralized exchange, or dex, the details will vary, but not by much.
In the future I’ll be featuring a number of decentralized exchanges individually and giving you more details on how they work.