Crypto has come a long way from its humble beginnings. What was once a market with just a few options for investors has transformed into a diverse ecosystem full of not only cryptocurrencies, but also companies creating business models that leverage these decentralized assets.
Some of the most lucrative companies in the crypto space are exchanges. Known as centralized exchanges, these companies provide investors with an easy-to-use platform to buy and sell cryptocurrencies and take a cut of every transaction to generate profit.
Conversely, there are also decentralized exchanges that are not run by any company. Instead, they utilize technology known as smart contracts, which facilitate trades without the need of a company.
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The major differences
After the year that was 2022, one in which multiple high-profile centralized exchanges went bankrupt, more and more people seem to be coming to the realization that decentralized exchanges are a more viable option for a handful of reasons.
First, they are more secure than centralized exchanges because they do not hold users' funds. In a centralized exchange, hackers can target the exchange to steal users' assets. Rather than having a centralized exchange hold user funds, decentralized exchanges let users hold their assets in their own wallets and trade directly with each other.
Second, decentralized exchanges offer more privacy than centralized exchanges because they do not require users to provide personal information. In a centralized exchange, users must typically provide personal information like their name, address, and Social Security number to create an account. This information can be vulnerable to data breaches, identity theft, and other forms of fraud. In contrast, decentralized exchanges do not require personal information, so users can maintain their privacy.
Finally, decentralized exchanges are more transparent than centralized exchanges because they are built on a blockchain network. This means that all trades are recorded on a public ledger, which can be audited by anyone. Centralized exchanges, on the other hand, are not transparent because they can manipulate prices or withhold information from users. This lack of transparency can lead to market manipulation and insider trading.
An opportunity at hand
So what does this all mean for investors? Well, there is actually a potentially profitable opportunity at hand -- investing in the world's most popular decentralized exchange, Uniswap (UNI 3.46%).
Uniswap has its own token, Uni, and has become one of the most widely used ecosystems that allows users to not only buy and sell crypto, but also stake, lend, borrow, and complete many other functions related to decentralized finance (DeFi).
As people are becoming more aware of the benefits that come with using decentralized exchanges as opposed to the more common centralized ones, Uniswap and its token are likely going to benefit.
In fact, it seems that this realization is already well under way. In March, Uniswap outdid one of the most popular exchanges, Coinbase Global, by a margin of more than 40%. Volume statistics show that Uniswap settled more than $70 billion worth of trades while Coinbase came in at just under $50 billion. This now marks the second month in a row that Uniswap has had more volume than Coinbase.
Furthermore, this trend has a legitimate chance of growing even more as centralized exchanges face increased pressure from legislators looking to regulate the cryptocurrency market. Although regulators might be able to target centralized exchanges and companies, they can't target decentralized protocols like Uniswap.
Should regulation arrive, which seems more likely by the day, Uniswap could become a true beneficiary. With its price still well off from its all time high, investing at today's prices could be a wise decision as the viability of decentralized exchanges becomes more evident.
