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What Are Decentralized Exchanges?

By Zhiyuan Sun – Sep 30, 2021 at 8:15AM

Key Points

  • Decentralized exchanges provide the only legal gateway for most Americans to access altcoins. 
  • Investors can benefit by both buying and holding altcoins or DEX tokens to take advantage of this rising trend. 

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This popular crypto investing method now accounts for a 3% market share in the bourgeoning crypto-finance space.

To put it simply, decentralized exchanges (DEXs) enable users to buy and sell cryptocurrencies with one another without the need for brokers. Users merely need to connect their crypto wallet to a DEX, such as Uniswap (UNI 1.28%) or PancakeSwap (CAKE 1.98%), select their crypto-crypto trading pair of choice, such as between Bitcoin and Ethereum, enter the amount, and hit the swap button. There are a lot more coins and tokens available on these exchanges, making them ideal for the adventurous investor.

Programming code that enables applications to self-execute agreements, otherwise known as a smart contract, automatically ensures the BTC trader obtains ETH and the ETH trader obtains BTC. Moreover, some wallets like TrustWallet are DEXs themselves with the function built-in, so one can simply perform the swaps directly inside the wallet instead of connecting to a platform.

But know that more than 100 million investors visit DEX platforms, with transactions amounting to over $4 billion per day. So what's behind the sudden surge in popularity? 

Blocks coming together in a programming space.

Image source: Getty Images.

Gateway to the blockchain cyberspace

I hate to disappoint the patriots, but America is not the greatest country in the world when it comes to altcoin investing. This is because the country's unique financial regulations and taxation laws make it very difficult for exchanges like Coinbase or Binance, the largest cryptocurrency exchange by trading volume, to list altcoins. Whether or not this actually benefits investors is a heavily disputed topic. For example, altcoins that can shield users from creepy blockchain tracking firms (privacy coins), such as Monero and Dash, have returned over 9,800% and 85,000%, respectively, since their inception a few years ago. 

So for most American investors (not including expats), the only legitimate way to get into the lucrative altcoin market is by swapping coins purchased on exchanges that support fiat money transfers on DEXs. Because no physical brokers handle the flow of funds for the transactions (it all takes place in one's wallet), DEXs are generally exempt from securities regulations. 476 and 1,988 different altcoins are listed on Uniswap and PancakeSwap, respectively. Meanwhile, one can only purchase about 50 different types of cryptocurrencies on Coinbase or Binance.us. 

Another path to riches 

But since these exchanges rely on peer-to-peer transactions, it can be hard to find sellers for large trade orders or little-known coins. That's where native tokens that help power DEXs come in (DEX tokens). Users can place their CAKE and UNI into money pools by accepting smart contracts to provide liquidity for trades, the same way that they would accept trading agreements when they trade stocks on a brokerage. In exchange, investors receive a cut of all trading commissions facilitated by their tokens. What's more, heavy demand for DEXs has caused these tokens to skyrocket as well, with CAKE and UNI both up three- or four-figure percentages in the past year. 

Overall, consider checking out DEXs to either buy and hold innovative altcoins or invest in DEX tokens themselves, which you can use to earn a fixed income. With the overall cryptocurrency market surpassing $2 trillion and soaring, the future is bright for this promising financial tool. 

Zhiyuan Sun owns shares of Bitcoin, Ethereum, Monero, PancakeSwap, and Uniswap. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

Stocks Mentioned

PancakeSwap Stock Quote
PancakeSwap
CAKE
$3.99 (1.98%) $0.08
Uniswap Protocol Token Stock Quote
Uniswap Protocol Token
UNI
$6.15 (1.28%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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