Why Should I Use a Decentralized Exchange (Like Binance’s New DEX)?

Binance just revealed a sneak peek of its new decentralized exchange (DEX). It’s slick, powerful, and will look familiar to current Binance users.

But why use a decentralized exchange instead of a normal cryptocurrency exchange like Coinbase or Kraken? Why is DEX the next generation?

In this article, we’ll run down some of the most important benefits. First, what exactly is a DEX?

What’s a DEX?

A decentralized exchange is a crypto exchange with no central authority.

Think about Coinbase for a minute. It is perhaps the most well-known exchange in crypto, but it’s highly centralized.

There is one company at the heart of it. Coinbase handles the exchange of money directly and stores all information on its servers. Most importantly, they control all funds on the platform. In other words, they technically own your crypto.

Centralized exchanges also require full identification, so your data is stored on their central servers.

A decentralized exchange aims to remove each of those elements. It’s a truly peer-to-peer exchange with no central authority and you keep full control and ownership of your funds.

Why Should I use a DEX?

1. Control your own funds

One thing you might not realize when you trade on Coinbase or Binance is that you don’t technically own your funds. The crypto is stored in wallets that belong to Coinbase or Binance. You are trusting them to look after it for you.

While that’s convenient, it’s not safe. It also goes against the grain of cryptocurrencies, which are designed to exist outside a third-party or banking system. With a DEX, you are in full control of your own private key and your own crypto funds.

2. Security

Because a centralized exchange like Coinbase holds your crypto in their wallets, it’s much more vulnerable to hacking. All data and funds are stored on the company’s server, so there’s one point-of-failure.

Crypto exchanges are regularly targeted by hackers because they hold vast sums of crypto in one place. Nearly $1 billion has been stolen from exchanges this year alone, and you probably remember the infamous $450 million hack at the Mt. Gox exchange.

A DEX removes that vulnerability by operating on a decentralized blockchain. Instead of one point of failure, the exchange operates on many servers all at once. That makes it extremely difficult to hack.

3. No government can shut it down

Since there is no central authority governing the DEX, it can’t be shut down.

For example, the Chinese government has a blanket ban on crypto exchanges. Binance was forced to move to Malta to get around the restrictions. In the US, exchanges like Coinbase must stick to strict regulations in order to operate.

You can’t close down or govern a DEX if there’s no central point of authority.

4. Permissionless

A founding tenet of cryptocurrencies is that they are “permissionless.” In other words, you don’t need someone’s permission (like a bank or a government) to use them.

When you use a central exchange like Coinbase, Coinbase is giving you permission to trade cryptocurrencies by asking for certain data and assigning you an account.

A DEX should be truly permissionless. Anyone can use it, with no restrictions.

5. Privacy

If you’ve used a mainstream exchange, then you’ve probably been asked to verify your identity. Coinbase, for instance, asks for ID verification to satisfy Know Your Customer (KYC) and Anti Money Laundering (AML) laws.

Your data is then stored on a central database. With a DEX, there should be no personal data stored on any central exchange. However, it remains to be seen whether the Binance DEX will require identification.

6. Faster and cheaper

By cutting out a central middleman, decentralized exchanges should operate with lower fees and faster transaction times.

The Downsides of DEX

Of course, decentralized exchanges are not perfect. They are still in their early stages and suffer from a number of problems:

Low liquidity – Not a lot of people use DEX platforms yet, so liquidity and trading volume is significantly lower than mainstream exchanges. That means it could be difficult to buy or sell certain assets.

Poor user experience – The benefit of using a mainstream exchange like Coinbase is that it’s slick and easy to use. DEXs are more primitive. They can seem overwhelming to beginners.

Lack of functionality – Again, because they’re in their infancy, DEXs have pretty basic functionality. If you’re looking for margin trading or stop-loss functionality, you may be disappointed.

No fiat conversions – You can’t load up your DEX account with dollars or euros because that would require KYC and AML procedures (ID verification). So you’ll have to make transfers in cryptocurrency only. Not a problem for intermediate users, but a big problem for beginners.

First Look at Binance DEX

If you’re excited by the concept of DEX trading, take a look at the new Binance platform:

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