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Learn more about DEXes and how they work in the 3rd part of the De-Fi series

We talked about Decentralized Exchanges in Part I of this series briefly. We received a number of requests to cover them in greater detail, and so here it is: A more detailed post on DEXes.

Centralized Exchanges (CEX)

First off, let’s talk a bit about CEXes and the problems we face with them. A CEX is similar to other traditional web-based services in that it’s usually a website where users create accounts and log into a view of their own personal account on the service.

The flow of how one would buy crypto on this type of services goes something like this:

Deposit fiat currency (USD, EUR, INR etc..) into your account -> Check prices of the crypto token you want and find a suitable level -> Place an order to buy the token -> Order gets filled -> Leave the token on the exchange in your account or withdraw to your own wallet.

As you can imagine the process of selling crypto is quite similar except that you start by depositing crypto to the exchange and withdraw fiat to your bank account, when you are done selling.

While this is great and is probably how 99.99% of people acquired their first crypto, it does leave a lot to be desired.

Problems

There are a number of problems with the flows described above for how people acquire and dispose of crypto in a CEX. Let’s cover them one by one.

Prone to Theft

It’s possible that your exchange is fraudulent and intends to steal your funds. Once you deposit fiat or crypto to an exchange they are in addresses or bank accounts controlled by the exchange. You are now dependent on them to perform as good actors and return your funds when you wish. This is unfortunately not always the case. There have been a number of high profile cases such as Quadriga and others where huge amounts of crypto were stolen by the exchange operators.

Can be hacked

CEXes by their very nature hold a lot of user funds and are natural targets for hackers that wish to bre...

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