“Switching to Decentralized Crypto Exchanges”
Cryptocurrency has revolutionized technology; its decentralized system has marked a before and after. Many industries have been obligated to keep up to date with the advances in these new technologies. Although crypto runs on a decentralized network, it still has to face working with centralized entities such as crypto exchanges. There is no doubt that crypto faces many challenges when it comes to changing our current financial system.
Cryptocurrencies exchanges are businesses that allow customers to trade cryptocurrencies for other assets, such as conventional fiat money or other digital currencies. In other words, besides having a digital wallet and make a trade from address to address; most of the trading gets done within exchanges.
Is this a problem?
Not at all because these exchanges have opened up the possibility to trade on a massive scale and provide liquidity; by selling crypto and receiving fiat cash in return. Centralized exchanges are regulated by government entities to prevent money laundering and more importantly impose taxes on crypto. Customers are also able to receive fiat cash deposited directly to a customer's bank account; this means exchanges in order to be accepted by banks they have to follow specific requirements imposed by these entities; known as Know Your Customer (KYC).
It’s not a secret that KYC is a headache to many; social media often trolls the process because of their invasive questions to open up an account in exchanges. It’s not only a headache for customers but for exchanges as well because many banks have decided not to work with crypto.
All these situations opened up the idea about decentralized exchanges (DEX). These decentralized exchanges provide the solutions for many businesses and customers; when it comes to the closing of bank accounts of KYC protocols.
One of the advantages provided by centralized exchanges according to Bitcoinst, “Some cryptocurrency exchanges store their private keys on centralized servers and thus it is a potential security risk for users’ funds. Decentralized exchanges do not store any coins or private keys on centralized servers, which greatly reduces the chance that users’ coins get compromised.” This is great to know considering recent hacks on Cryptopia and Binance, which expose how vulnerable exchanges can be.
However, what does it mean to work with a DEX?
It means that these exchanges don’t operate in a fixed point they run everywhere in the world; because they work with blockchain technology. Therefore, it can't be shut down unless the whole network is shut down. These exchanges are needed because several countries have banned crypto; making it almost impossible for users to have access to digital assets and trading for that matter. Choosing to work with a DEX also means you are in control of your crypto, users are 100% responsible for their funds. In addition to this, DEX'S also provide faster and cheaper transactions.
Different from centralized exchanges, users can trade as usual and earn profits only in the form of digital currency; making the conversion to fiat cash a tedious process. The creation of decentralized exchanges will undoubtedly bring benefits to the world of cryptocurrencies. Thus, regulations issued by authorities will no longer be a problem with this new system.
Although decentralized exchanges provide many benefits, there will still be new problems to face. These new exchanges will make it impossible for government entities to control them. It sounds very appealing, but it may result in a worse relationship between banks and crypto; giving banks the perfect opportunity to be more restrictive and evasive when working with cryptocurrencies — making it harder for people to withdraw fiat cash; harder but not impossible at least at first, because eventually, developers will find a way to make this work.
Should crypto care about having a good relationship with the government and banks?
The main idea behind the creation of bitcoin and its blockchain technology was to eliminate third-party interference, but until our whole financial system is modified and fully adopted; crypto has to deal with working with centralization. Cryptocurrencies have been gradually entering the financial system and because society hasn’t entirely switched to cryptocurrency people who invest in these digital assets need profit and at some point, cash out these profits into fiat cash; in other words, centralized money like the USD.
Decentralized exchanges open up the possibility to trade without government regulations but yet makes it harder to cash out. Yes, harder, but not impossible. There are always ways to cash out; this can be done by depositing your assets directly into your wallet and selling them to someone who can pay with cash, or using a crypto ATM. Another solution to this can also be using crypto on these DEX'S that are backed by fiat currencies like Tether; backed by the USD.
Unfortunately, it all comes back to fiat currency, thus relying on centralized systems. This will keep on happening until there is a mass adaptation to cryptocurrency. Hopefully, in the future, our financial system will change, and there won’t be the need for converting to fiat cash because crypto will be accepted on regular businesses.
I hope you enjoyed it. Feel free to comment!
@carolinaninap