Get Off of Centralized Exchanges, Start Using Decentralized Exchanges

If you’re new to the world of cryptocurrency, you’ve likely bought some Bitcoin or Ethereum using your phone on popular centralized exchanges like Coinbase, Crypto.com, Kraken, or Gemini. These are all examples of centralized exchanges. But did you know there’s another option called decentralized exchanges? It’s on decentralized exchanges that the true spirit of crypto thrives, offering opportunities and risks that are not found on centralized platforms.

Centralized Exchanges and Liquidity

When you use a centralized exchange, the exchange is providing the liquidity that allows users to swap one cryptocurrency for another. The exchange holds the crypto on your behalf, and you see the numbers on your screen as your portfolio. However, you do not actually own the crypto you see in your account.

Decentralized Exchanges and Liquidity Pools

In contrast, decentralized exchanges use liquidity pools to facilitate the trading of one crypto for another. These pools are created by individual users, who add their tokens to the pool and provide liquidity for other users to swap one crypto for another. On a decentralized exchange, you actually own the crypto you are swapping, holding it in a wallet that you control with a seed phrase.

The Risks of Centralized Exchanges

A major issue with centralized exchanges is that they could be dishonest about their liquidity. They may allow people to swap crypto that they don’t actually have available at the moment. If you tried to withdraw this crypto, you wouldn’t be able to. The most recent and prominent example of this happening was with FTX, where thousands of people were misled about the crypto they thought they owned.

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Another issue with centralized exchanges is that not all cryptocurrencies are available to be traded. Many centralized exchanges charge a large fee for listing a crypto, or they may refuse to list a crypto if it doesn’t meet their “requirements.”

The Benefits of Decentralized Exchanges

On a decentralized exchange, all the liquidity is transparent and verifiable on the blockchain. You can see that there is crypto available to be traded, and since you are holding this crypto in your own wallet, there is no question that any crypto you trade is officially owned by you.

On a decentralized exchange, there is no barrier to entry. Anyone can create a crypto and list it on the exchange, as long as they provide a little bit of the starting liquidity. This provides a unique opportunity for users of decentralized exchanges to invest early in potentially good opportunities. Usually, when a crypto is listed on a centralized exchange, it has already seen the most of its upward price performance. The people who made a lot of money on that crypto were those who bought it early on the decentralized exchange.

Convenience vs. Responsibility

Centralized exchanges provide a great convenience and feeling of security for new crypto users. You can easily download an app on your phone and begin trading crypto. However, because there are barriers to entry, it is uncommon for a blatant scam to be available for trade on a centralized exchange.

Decentralized exchanges bring in a new complexity for crypto users. It requires self-responsibility and caution. You are responsible for the safety of your crypto, and if you lose your seed phrase or accidentally buy a scam token, you could lose everything. Since anyone can create a crypto and list it to be traded on a decentralized exchange, there are scams everywhere.

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Conclusion

In the end, decentralized exchanges are what crypto is all about. Crypto exists so we don’t have to trust someone else with our money. When you use a centralized exchange, that’s exactly what you’re doing. In addition, the stories of “mad gains” and amazing success stories come from smart and early investments on decentralized exchanges. If you can identify a good crypto before the masses that only know how to use a centralized exchange, making 10x, 100x, and even 1,000x + on your initial investment is not out of the realm of possibility.

Ben DuBard

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