Decentralized exchanges facilitate cryptocurrency trading on a distributed ledger and do not hold their customers' personal data, account balances, portfolio allocations, or fund positions.

Although DEXs aren't a surefire way to make investors immune to criminal behavior, they provide far greater control over our coins than their more centralized counterparts. With this in mind, let's take a deeper look into what defines a decentralized exchange and the key considerations investors should take in choosing their favored DEX.

How Do DEXs Work?

Decentralized exchanges utilize smart contracts to enable traders to exchange assets without needing an intermediary. Meanwhile, the services offered by centralized exchanges can be compared to those available through banks. These centralized exchanges store our crypto in central locations and provide their own levels of security and surveillance, which can help to make it more straightforward to move coins around and exchange them within an online platform.

Due to their decentralized nature, DEXs allow users to trade directly from their wallets by implementing smart contracts behind the trading platform. This gives traders full responsibility over their crypto, and only they will be to blame should money end up in the wrong wallet or they lose their private keys.

Leading decentralized exchanges have been built directly on blockchains that support smart contracts. Typically utilizing the sprawling Ethereum decentralized finance ecosystem, there is currently a broad range of exchanges that enable users to access countless crypto assets that their centralized counterparts have no access to.

But which DEX is best equipped to suit your needs? Let's take a deeper look into five considerations investors should make before choosing a decentralized exchange.

1. Evaluate Your Cryptocurrency Goals

Although decentralized exchanges are great for delivering greater levels of control over your cryptocurrencies and can provide access to far greater volumes of assets in relation to centralized exchanges, it's important to note that they can be difficult for inexperienced traders.

To begin trading using a DEX, you'll need to hold an external cryptocurrency wallet like MetaMask and link it to the DApp. Although this process can be automated, it can also become tedious for users who are used to having their wallets embedded within centralized exchanges.

With this in mind, if you're an investor who simply wants to buy and hold Bitcoin, it may be worth embracing centralized exchanges and either holding your coins in their embedded wallets or transferring them to an external wallet to keep over the long term.

2. Consider the Cryptocurrencies You Want to Exchange

Although a DEX can empower traders to discover huge volumes of small-cap cryptocurrencies to exchange, options are limited to their respective liquidity pools. This means that some exchanges will have more choices than others.

For instance, Uniswap holds around 5,500 tokens to exchange, SushiSwap possesses more than 1,400, and Pancake Swap holds just 290 tokens.

Elsewhere, 1Inch supports thousands of tokens due to the DEX crawling more than 50 Ethereum liquidity sources to offer competitive trading rates, which can be a great asset for traders looking to access the largest possible pool of cryptocurrencies.

Before settling on a DEX, remember which coins you'll most likely exchange and check to see which exchanges host them.

3. Understand Your Risk Tolerance

Centralized exchanges generally undergo a vetting process before listing new tokens for users to buy and trade. However, due to the decentralized nature of DEXs, it's possible for just about anyone to create a coin and list it for individuals to buy via a decentralized exchange.

This makes DEX users more prone to rug pulls, where a coin owner will open their cryptocurrency for purchase before withdrawing their sizable stake in the asset—sending its value crashing.

Even if you're happy with the coin you've researched and want to buy, it's worth remembering that small-cap coins like the ones listed exclusively on DEXs are more prone to possess far greater levels of volatility than their larger-cap counterparts. This can make coins riskier to hold.

4. Consider User-Friendliness

Different exchanges possess different interfaces and varying levels of complexity. It's important to know the differences between the likes of Pancake Swap, 1Inch, SushiSwap, and Uniswap regarding usability.

For newer users, the simplicity of SushiSwap may hold more appeal, although Uniswap has established itself as a market leader across the DEX landscape, and its simple layout alongside various extra features shows why it's favored by so many traders.

5. Weighing the Dangers of Unvetted Tokens

Finally, it's important to cover the dangers of unvetted tokens listed on DEXs. Because they're decentralized platforms, you're more likely to encounter a scam through using a DEX due to the high volumes of accessible cryptocurrencies available to buy throughout the ecosystem.

Whether it's a copycat coin designed to fool investors into buying into a rug pull, or a Ponzi scheme that the owner has paid a cluster of influencers to promote before pulling their equity, you must stay vigilant when using any DEX.

For the many of us who have concerns about being scammed for our money, it could be worth choosing a DEX that actively promotes crypto and blockchain literacy for its users.

Although many DEXs have sought to introduce risk ratings before a trade is set up, such as Pancake Swap's traffic-light risk assessment system, users need to take more time researching assets before buying them.

Alongside Pancake Swap's useful risk warning system, DEXs like SushiSwap, 1Inch, and Uniswap all have useful blogs and guides listed on their respective websites to help users to stay aware of any threats.

Interoperability Is Rewarding

Many investors don't simply look for one favored DEX and instead choose to link their wallets to the most useful exchange at the time that suits their needs best. This allows users to assess risks through Pancake Swap while continuing to exchange their crypto using Ethereum on alternate exchanges as and when required.

Whether you're taking your first steps in crypto or are a seasoned trader waiting on their third bull run, using a DEX can be a great way to keep your assets under control and sidestep the security vulnerabilities of centralized exchanges. Furthermore, with the right amount of research and external wallet usage, utilizing a DEX to make exchanges can become entirely seamless.