Why I No Longer Trust Centralized Exchanges: A DeFi Guide

Frequently Asked Questions

01.What is a decentralized exchange (DEX)?

A decentralized exchange is a protocol that allows peer-to-peer token trading directly from a self-custody wallet, using smart contracts instead of a central order book or custodian. Users retain full control of their private keys throughout every trade.

02.How do Automated Market Makers (AMMs) set token prices?

AMMs use the constant-product formula x multiplied by y equals k, where x and y are the token reserves in a liquidity pool. As traders buy one token, its reserve shrinks and its price rises automatically without any order book or counterparty matching.

03.What is impermanent loss in a DeFi liquidity pool?

Impermanent loss occurs when the price ratio of two pooled assets diverges after deposit. The AMM rebalances the reserves, which means a liquidity provider holds fewer of the appreciating token relative to holding both assets outright. The loss is unrealised until withdrawal if the ratio has not recovered.

04.Why do StableSwaps offer lower slippage than standard AMMs for stablecoin pairs?

StableSwap protocols like Curve Finance use a hybrid invariant combining a constant-sum curve with a constant-product curve. Near the peg, the curve is nearly flat, so large stablecoin trades move the price very little, producing slippage under 0.1 percent on multi-million-dollar swaps.

05.How should founders decide between a centralised exchange and DeFi for treasury management?

Founders should use centralised exchanges only for fiat on-ramp and off-ramp. For treasury swaps, yield generation, and cross-chain moves, DeFi protocols give custody-retained settlement with on-chain auditability. Centralised platforms introduce counterparty risk and withdrawal freeze risk that is unacceptable for business-critical operations.