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What Is a Decentralized Exchange (DEX)?

Read 6 min
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— A Decentralized Exchange (DEX) allows you to trade cryptocurrencies while owning your private key, thus keeping control of your crypto

— Other advantages of a DEX include lower fees and potentially enhanced security

— Ledger hardware wallets can be used with many DEXs, while empowering you with the highest security for your private keys

When looking to trade cryptocurrencies, one most often needs to use an exchange to do so. However, did you know that there’s two types of exchanges? Centralized ones, where you are not in full control of your own crypto, or Decentralized ones also known as a DEX. Today, we’re taking a closer look into what a DEX is and what it brings to the table.

Looking to start your journey into the wondrous world of cryptocurrencies? Most likely, you’ll find yourself using a crypto exchange to get your very first Bitcoin or other crypto of your choosing. After this, that crypto exchange can still be pretty useful to you, since you can trade one digital asset for another there. For example, you could swap your Ethereum for XRP if you want. 

However, did you know that the crypto you keep on an exchange is actually not in your control? 

You cannot do what you want with your own crypto. The exchange holds a vital piece of data: your Private Key. Remember the famous crypto saying Not your key, not your coins? Since the exchange holds your key, they own your crypto and have control over them. 

Now, imagine if there are security issues on the exchange’s platform. We’ve seen several of them being hacked for hundreds of millions of dollars over the years. Part of the reason is that these exchanges are centralized: there’s a single place where their huge crypto wealth is stored – a great target for hackers.

That’s where Decentralized Exchanges come in.

What Is a Decentralized Exchange (DEX)?

A decentralized exchange – or DEX in short is an exchange where YOU hold your keys. Remember that Private Key we mentioned earlier? With a DEX, you actually hold the Private Key. This means you remain in total control of your own crypto, and you decide how its security is handled. Also, that single point of failure we mentioned for normal exchanges? A DEX doesn’t have that: everyone keeps their own keys, so the wealth is completely dispersed. It is decentralized. That said, a DEX doesn’t offer the same services. Let’s dive deeper into it.

What Is a Decentralized Exchange (DEX) For?

Let’s start with the most important part: How can you hold your Private Key, but still trade your cryptocurrencies for another? Well, with centralized crypto exchanges, you used to have to make an account to log in and use their services. With a DEX, your Private Key counts as your login. Once you log into the DEX with your Private Key, you’ll immediately see your crypto balances. You won’t have to provide any personal information – great for those who value their privacy! 

This doesn’t mean that a DEX doesn’t come with its own challenges. Let’s go over the pros and cons of using a Decentralized Exchange.

Benefits of Decentralized Exchanges

You’re probably aware that traditional crypto exchanges handle the swap of one digital currency for another for you. So how’s this different for a DEX? 

They actually don’t handle the exchange itself: it’s purely peer-to-peer. This means that the platform is basically there to help you trade your crypto with someone else directly, rather than getting involved in it. Ok, sounds great, but what does this mean for you? Two advantages: 1. You don’t need to trust anyone for the trade to take place. 2. The fees paid for the trade are usually lower than with normal exchanges.

Lastly, let’s talk security. A DEX is decentralized, meaning each individual person keeps their own crypto secure. You don’t have to entrust the security of your crypto to someone else – you’re completely in control of it. 

This is a blessing… but can also be a curse if you don’t take this responsibility seriously.

Risks of Decentralized Exchanges

Reading this article, you might be thinking that you prefer to start your crypto journey through a DEX, right? Well… that’s not going to happen, unfortunately. A DEX is an amazing tool for trading. On the other hand, it doesn’t allow you to buy your cryptocurrencies there though. There might be a feature to buy crypto on their page, but it’ll be an outside service: it’s not actually within the DEX platform itself. Decentralized exchanges only provide the option to trade your crypto assets, not to purchase some with Euros or US Dollars.

Being in charge of the security of your private keys can be an amazing thing, but it also means you are completely responsible for it. A problem when using a DEX is that most methods require you to enter your private keys on a computer or smartphone. This makes them vulnerable to online attacks. 

You’ll need to first get a good grasp of how you can secure your private keys. The best and easiest way to secure your private keys is with hardware wallets, like the ones we create. We recommend everyone wanting to use a DEX to read this article showing the different ways you can secure your private keys.

Lastly, a decentralized exchange is pretty different to use from usual exchanges. It’s not as simple as logging in and clicking just two buttons to trade your Bitcoin for Ethereum. Use cases for a DEX are often a bit limited: due to its complexity, it’s more for advanced users. Also, the assets you can trade on a DEX are usually somewhat limited. That said, it can be used to help diversify your crypto portfolio while maintaining ownership and privacy.

Stay Secure: Access DEXs With Your Ledger

So the best and easiest way to secure your Private Keys is using a hardware wallet. Why? The answer is pretty simple: your computer or smartphone is connected to the internet. This can look completely harmless, though the opposite couldn’t be more true. Someone can use this to hack your computer or smartphone and gain access to all the data that’s on it, including your private keys. If they get access to this, they can steal all of your crypto assets.

Hardware wallets make sure that your private keys never end up on your PC or phone. It remains completely offline, out of reach from hackers.

You’re probably wondering to yourself: can Ledger devices be used with decentralized exchanges? Well good news: Yes, Ledger hardware wallets can be used with multiple DEXs! Back in the beginning of 2019, our devices became the first hardware wallet that can be used with the famous Binance DEX. The list of DEXes that the Ledger Nano X and Ledger Nano S Plus can connect to is endless: 1inch, dYdX, IDEX, Waves Platform, and many more!

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Get Rich Quickly In Crypto.

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