Decentralized cryptocurrency exchanges have become wildly popular of late, as more and more people discover their potential to make a profit. However, while this is unquestionably the case, there are also serious risks associated with these types of exchanges, and anyone who wants to turn a profit in this area should understand that there are real risks involved. To that end, here are five pros and cons of such an exchange.
What is a decentralized cryptocurrency exchange?
According to the financial experts at SoFi Invest, this type of exchange, “is a digital currency exchange that allows users to buy crypto through direct peer-to-peer cryptocurrency transactions over a secure online platform without an intermediary.” In other words, unlike the stock market, there is no overarching regulatory body, like a stock exchange or governmental agency.
Pros of a decentralized cryptocurrency exchange
- The decentralized nature of the market means that trades can occur at the time, place, and speed that works best for you, with only outside market forces – and not some other entity – controlling the nature of the trades.
- The removal of a third party can lower the overall costs of trading, resulting in more profits for all parties involved.
- It is much easier to make anonymous trades and protect the privacy of all parties involved.
- The decentralized nature of this exchange makes it much, much harder for individuals to become the victim of fraudulent trades or bad actors. Indeed, the blockchain technology used by decentralized exchanges can serve to protect users.
- The barriers to entry are greatly reduced for decentralized markets, meaning that anyone can not only begin to trade certain coins but can create new trades and tokens for the purposes of trading. This is clearly not the case with a stock or bond, which requires an asset to be placed behind any trade.
Cons of a decentralized cryptocurrency exchange
- The lack of third-party oversight makes it far too easy for an individual to be scammed.
- The lack of third-party regulations can make the market much less predictable and harder to understand.
- While privacy and anonymity can be protected, this also means that bad actors – including organized crimes and terrorist groups – can use decentralized exchanges to launder money and profit.
- If a scam does occur and someone is the victim of a fraudulent trade, the lack of third-party oversight means that it will be virtually impossible for funds to actually be recovered. This is why people who use decentralized exchanges should be extremely careful with how they trade.
- Decentralized exchanges can be extremely unpredictable in terms of their trading power and the behavior of markets. This can make it extremely difficult for investors who are seeking predictability and stability to enter these markets.
As you can see, using a decentralized cryptocurrency exchange comes with serious positives and negatives. That’s not to say that you should or shouldn’t use this type of trading, but it is to say that you should be fully aware of the potential risks and rewards before you do so.