The Safest Ways to Use Decentralized Exchanges
Decentralized exchanges are one of the best ways to buy and trade cryptocurrency, but because they are decentralized, this means that there are no legal entities governing their use—so how can you be sure that you’re using them safely?
When you use decentralized exchanges, never leave your money on the exchange, additionally, you should check reviews and how the exchange works before using it. Read on to learn more about the safest ways to use decentralized exchanges.
1. Check Out the History of the Exchange
Before you even sign up for an account on a decentralized exchange, you should take the time to look into the history of the exchange. How long has it been around? Who created it? What consensus mechanism does it function on?
You should be able to find this information; if you aren’t, definitely do not make an account. We do want to mention, however, that many DEX (decentralized exchanges) are made by someone with a pseudonym. This isn’t necessarily bad, as long as they are open source and provide information about their consensus mechanism up front. Still, proceed with caution, especially if they have other red flags covered later in this article.
2. Check the Reviews
Any decentralized exchange that has been around for a while should have some positive reviews. If they don’t have any, this is an immediate red flag. Besides just reviews, you should also try contacting customer service via email or chat—whatever is offered. If you get a response, great; if you don’t, we recommend not proceeding with that DEX.
3. Check That You Are On The Right Exchange
There are so many fronts out there operating as DEXs, with their domain just being one letter or word off of a famous one. Like, instead of Binance.com, you’ll find yourself at Biniance.com and so on. Once you are 100% sure you are on the right domain, bookmark it and always use the bookmark to return—this way you won’t accidentally find yourself somewhere you didn’t mean to be.
4. Start Small
If you found all of the above information and found it satisfactory, you can proceed with opening an account on the DEX. Just make sure you start with a very small deposit, purely for testing how the exchange works, before depositing your life savings.
If possible, we recommend starting with only $10 or the equivalent, and ensuring you don’t connect your wallet directly to the website. We even recommend a decoy or second wallet (apart from your main wallet) purely for testing things like this. You can even open a Coinbase or Binance wallet solely for the purpose of keeping a small amount of money for testing decentralized services—whatever is best for you.
Some even recommend having one wallet for trading, and one for storage, if you plan to interact with DEX frequently. We think this is an excellent idea.
5. Wait
We know after your test deposit, you are ready to make a bunch of trades, but we recommend waiting a bit, testing out the site, and learning how all aspects of the site work. You don’t need to wait forever, but 3-5 days of learning can go a long way. If the exchange tries to convince you to trade right away, run.
6. Don’t Grant Perpetual Wallet Access
Once you have waited and are finally ready to trade, you can connect your trading wallet to the exchange. We recommend only ever giving the bare minimum of access to the exchange. For example, if it asks if you want the connection to be permanent, 24 hours, or only 2 hours, we recommend choosing the 2-hour option. While this is more work for you, it will keep your investment and wallet protected should the DEX ever become compromised.
7. Don’t Store Funds on a DEX
We recommend using DEXs solely for trading. This means you log on, you do the trades you need, and you move your money to your wallet and log off. Of course, this means you can’t participate in liquidity pools (which we do think is a good idea), but this is the safest way to protect your money on a DEX.
If you are participating in liquidity pools, that’s good, just ensure you remove everything you don’t have invested in the pools off the DEX when you aren’t actively trading. Unfortunately, even the best DEX have security flaws which are often exploited via malicious hackers. This means that even the best DEX poses a risk to its customers. While there is little you can do to protect your liquidity pool (and we hope everything will be okay!) ensure you do not store anything beyond what is invested in the liquidity pools on the website.
8. Don’t Invest in Unknown Tokens
DEX are great because you can trade any token you want, but remember that decentralized exchanges don’t have the same token verification requirements that centralized exchanges have. For that reason, we recommend only investing in tokens on decentralized exchanges that you trust and skipping anything you are unsure of. Remember, you should research any token you are interested in investing in—do not buy blindly, not even if your Facebook friend says it’s the next big thing!
Trusted Decentralized Exchanges
Everyone has different requirements for decentralized exchanges, but below are a few we trust. Now that doesn’t mean they are safe, just that they have a long track record and history of happy customers.
· Uniswap
· Curve Finance
Again, even if you choose to use these platforms, ensure you aren’t storying funds unnecessarily. And if reading this article has made you nervous, know you can stick to centralized exchanges until you feel more confident—as always the choice when it comes to investing your crypto is yours to make!
Overall, decentralized exchanges are an amazing tool, but they can be used incorrectly. Follow all of these tips to ensure you are using decentralized exchanges safely.
