There are several negative features and risks of using decentralized exchanges:
- In most modern DEX, crypto-assets can only be exchanged within a single blockchain. Sometimes cryptoassets from different networks are added to DEX via crosschain bridges, but this complicates the trading process.
- Non-permanent losses are common on decentralized trading platforms.
- Decentralized exchanges have limited trading features, no familiar options such as different types of orders (e.g. Limit or Stop Loss) or leveraged trades. There are no additional tools, such as a ribbon or order book.
- Any trades, including those that are wrong or fraud-related, are executed automatically through the blockchain and cannot be reversed or challenged at the help desk. This is often used by cybercriminals to sell stolen cryptocurrency.
- The speed of exchange transactions in DEX depends on the speed of transaction confirmation in the blockchain and ranges from a few seconds to a few minutes. Therefore, high-frequency trading in decentralized exchanges is not possible.
- Decentralized exchanges typically have less liquidity than centralized venues. Therefore, when buying or selling large positions in low liquidity pairs, users may encounter so-called price slippage, which reduces the benefit to the user;
- Commissions for transactions in DEX are higher than in the centralized exchanges. In addition, users also have to pay network commissions.
- When exchanging assets and on large volumes, users can fall victim to price manipulation by MEV bots.
- Since most of today’s DEX does not have a centralized asset listing system, this is exploited by scammers issuing fake tokens to implement criminal schemes, including Pump & Dump and Rug Pull.
- Because of vulnerabilities in the smart contract code or web interface, DEX is susceptible to hacking and cracking. For example, on June 8, 2022, $5 million in assets were stolen from Osmosis DEX liquidity pools. Such incidents do not threaten exchange users’ funds, but can result in the loss of liquidity providers’ funds.