We in crypto prize decentralization over almost everything. However, decentralized platforms such as exchanges have their own common problems which you as a user need to be aware of before jumping on the bandwagon.
In this post, I will be sharing with you the 4 major disadvantages of decentralized cryptocurrency exchanges.
We'll discuss each of the above points below.
It's more expensive to trade on decentralized exchanges than on centralized ones.
First, the trading fees on decentralized exchanges are higher. Additionally, you pay a blockchain network fee for every transaction which can all add up to very significant expenses especially on blockchains such as Ethereum.
In fact, there are multiple fees on decentralized cryptocurrency exchanges:
i. You pay a transaction fee to approve every token you trade for the first time.
ii. You pay a liquidity provider fee (usually 0.2 to 0.3% depending on the exchange) to swap the token to another.
iii. You pay a blockchain network transaction fee for every token swap on the exchange.
The transaction fees on decentralized exchanges are far greater than what you pay on centralized ones where you pay as low as 0.01% and in some cases, even less to sell one token for any other token on the exchange.
Thus transacting on decentralized exchanges is more expensive than centralized exchanges. Some centralized exchanges even charge zero transaction fees and others pay you to trade on their platform.
That's how far different the world of centralization and decentralization are in terms of the cost of transactions.
Though decentralized exchanges have greatly improved their user experience over the past few years, they're still very complicated for beginner crypto traders and investors.
First, a beginner has to create and secure a compatible wallet, fund it, connect it to the exchange, select the token pairs, approve the exchange to spend the selected tokens and execute the transaction.
Doing all of the above will sometimes require dealing with more than one platform and some maths of what amount of the coins to leave out to cover for transaction fees, etc.
Though the process becomes simpler the more frequent you and the more experienced and technically savvy users may not find it troublesome, newbies do not find it fun.
However, on centralized exchanges, you only need to create an account by filling a simple form that requires just your email address and a password.
Then you can fund your exchange account by transferring funds from an external wallet or buy crypto directly on the exchange using your bank card.
Almost every decentralized cryptocurrency exchange is run by anonymous teams who can disappear into thin air anytime.
As a result, it has become a scammers haven. You'll see new decentralized cryptocurrency exchanges pop up every day with ridiculously high returns and investment schemes designed to corner and steal from unsuspecting investors through exit scams, rug pulls, soft rugs, etc.
You will want to look well and ensure the so-called decentralized exchange you're using is at least, backed by a committed and competent team and that their offerings are realistic.
When in doubt, don't use them, no matter what.
More so, anybody can create and list any token (even a fake version of an existing one) on decentralized exchanges. Inexperienced and unsuspecting users would usually fall victims to these clever scams and lose their money as they would be buying the fake token which they mostly wouldn't be able to sell afterwards.
There are just too many ways for you to get scammed on a decentralized exchange, and that's why those who don't have the stomach or risk appetite always prefer to use centralized exchanges.
If you forget your password to a centralized exchange account, you could recover your money with a few minutes or hours of chat with their customer care. That is not possible with decentralized exchanges.
Decentralized exchanges are non-custodial by nature, as such your funds are always in your wallet, secured only by your private key or seed phrase and wallet password.
If you ever forget the password to your wallet, you can still recover it using your seed phrase.
However, if you lose your seedphrase, your money is gone forever. There's no support or customer care to contact to help you recover your funds.
Remember, you're your own bank, and it's your full responsibility to protect your money from loss and theft.
On centralized exchanges, if your account gets hacked by no fault of yours, you may be reimbursed by the exchange as KuCoin did for its users in September 2020.
But if your wallet or a decentralized exchange gets hacked, you can kiss your money goodbye.
Some people are not prepared for the responsibility decentralized exchanges impose on their users. Plus they're more expensive and have a poor user experience.
However, if you have the knowledge, experience, and resources you will find that decentralized exchanges offer you greater control of your money, and relative privacy.
What other disadvantage(s) of decentralized exchanges do you have? Share with us in the comments section below.