Since years, there has been a heated discussion in the cryptocurrency community regarding whether decentralized exchanges are superior to centralized exchanges.
The majority of bitcoin users undoubtedly support decentralized exchanges in theory and in practice because, well, cryptocurrency is decentralized.
Decentralizing everything necessitates moving away from platforms like Coinbase rather than toward them. In reality, centralized exchanges continue to provide a smoother, quicker, and more dependable trading experience.
Wait a second, is it still accurate? We are unsure whether the age of the DEX has arrived due to the rise and development of Uniswap, a potent decentralized exchange based on Ethereum.
Which of the two exchanges, Coinbase vs. Uniswap, is superior? Let’s look at what each exchange has to offer, along with a few worthwhile sidebars for your education.
An Overview of Decentralized Exchanges’ History
What’s the difference between centralized and decentralized exchanges?
Simply put, using a centralized exchange compels you to trade and store your crypto assets through a third party. A decentralized exchange, on the other hand, enables peers utilizing independently hosted cryptocurrency wallets to connect and transact in private.
The idea that decentralized exchanges are superior to centralized ones is fundamentally based on the latter’s propensity for hacking. As you may know, centralized exchanges hold cryptocurrency in so-called hot wallets. A hot wallet maintains cryptocurrency loaded up for easy access, making it network-connected and incredibly hackable.
Look no farther than the infamous $500M+ losses incurred during the assaults on Mt. Gox and Coincheck for examples of such hacks.
By facilitating peer-to-peer trading between self-custody crypto wallets, decentralized exchanges address the security concerns plaguing the cryptocurrency market. Self-custody essentially means that you are the one who stores your cryptocurrency, not an exchange or other company.
Since 2014, there have been many efforts at the DEX format, but none have really taken off until EtherDelta. While EtherDelta had a number of issues resulting from the exchange’s off-chain architecture, it improved trade by allowing self-custody. Despite widespread criticism for the exchange’s poor performance, EtherDelta really laid the groundwork for major developments in the field.
Decentralized exchange architecture further divided into on-chain and off-chain after EtherDelta. The latter led to the creation of protocols like 0x, whereas the former gave rise to the AMM (automatic money maker) format that was later adopted by Uniswap and Bancor.
In fact, decentralized finance protocols like Compound, Aave, and Curve are almost entirely innovative because of the on-chain AMM format.
What Is Uniswap?
You and the rest of the world can swap tokens directly from your self-hosted cryptocurrency wallet thanks to the decentralized Uniswap protocol. You can utilize Uniswap without giving up your private keys or privacy information; all you need to do is connect your MetaMask.
There isn’t a middleman while using Uniswap. The only people in charge are you, your peers, and smart contracts. The Uniswap protocol serves two primary purposes:
- ERC-20 token trading
2. Earn trading commissions by giving the protocol access to liquidity.
As a result, while you can trade as you normally would on conventional exchanges, you can also make money by supplying token liquidity.
How is Uniswap put to use?
Many people praise Uniswap for being a decentralized exchange. To be clear, it isn’t really a decentralized exchange, but only if we’re really picking at straws.
Instead, an automated liquidity protocol is the correct term to describe what Uniswap is. Because Uniswap uses an automated liquidity protocol, it just helps traders exchange liquidity; it doesn’t store liquidity or manage an order book.
Instead, Uniswap enables participants to establish liquidity pools by putting tokens into smart contracts built on Ethereum. Token swaps are built on these liquidity pools.
Here is an illustration to help you understand what this all implies.
- Say you recently developed an ERC-20 token. Your new token needs to be paired with a liquid exchange token like ETH in order to have value and allow other people to trade for it.
2. So, you deposit X and Y amounts of each token into Uniswap to establish a liquidity pool between your token and ETH.
3. Due to the fact that you are the sole owner of your token, coupling it with ETH in a Uniswap liquidity pool allows everyone who has ETH a platform to purchase your token.
4. People use Uniswap to access your money market and trade ETH between their wallets and the liquidity pool stored by smart contracts. Swaps start moving in the opposite direction when people start trading back to ETH as more wallets become exposed to your cryptocurrency.
Now, using Uniswap is really easy if you’re just a regular altcoin trader who wants to fill your bags with the newest coin.
- Go to uniswap.org and launch the web application.
2. your MetaMask wallet connected (make sure to have ETH for gas fees)
3. From the drop-down, select the token you want to trade, or type the contract address.
To trade, enter the amount you’re buying and use your MetaMask wallet’s liquidity pool as your source of funds.
