A decentralized exchange (DEX) is a digital asset exchange platform that operates on the principle of decentralization, i.e. without the involvement of a central authority. A decentralized exchange enables peer-to-peer trading of digital assets, i.e. directly between investors. Therefore, users do not have to transfer their assets to the exchange, which reduces the risk of possible theft or hacking of the exchange’s servers. Decentralized trading also avoids potential price manipulation or fraudulent trading.
Decentralized exchanges are much more advanced than centralized exchanges. Among other things, they provide better privacy protection, but they do not yet enjoy the popularity they deserve. Decentralization is the key to the development of cryptocurrencies, and operations based on Blockchain technology. Centralized exchanges are only apparently secure. The most widely used exchanges will always contain some security vulnerabilities present in all centralized systems, as it is impossible to exclude them without eliminating the human factor.
With DEXs, a much more secure and above all individualized way of transacting cryptocurrencies can be achieved. Decentralization has the potential to eliminate the potential drawbacks of the cryptocurrency economy and thus to widen the circle of users and increase the number of applications. It is undoubtedly an innovative model for conducting cryptocurrency exchanges. This model is constantly being perfected, so new decentralized cryptocurrency exchanges have been and are being created.
What is DEX?
A decentralized exchange (DEX) is an exchange that operates based on a distributed registry. It does not store users’ funds or personal data on its servers and acts solely as a platform for finding matches on offers to buy or sell users’ assets. Trading on these platforms is done directly between participants (peer-to-peer) without financial intermediaries. In other words, a DEX is a virtual space dedicated to conducting trade transactions on digital assets.
There is a paradox in the world of cryptocurrencies. Cryptocurrencies are decentralized, as there is no central authority or government controlling their issuance. However, their decentralization ends when they are exchanged for other cryptocurrencies or fiat money. Most of the time, these operations take place in centralized exchanges or exchanges. That is, there are centralized servers and one or more owners who can freely dispose of this exchange. This significantly increases the risk of interference in users’ transactions.
The goal of DEX is to eliminate intermediaries and create a single point of failure by performing transactions directly between users, on the blockchain itself that supports the platform, bypassing the trading platform. In this way, DEXs provide buyers of an asset with the infrastructure to find sellers and vice versa. The main advantage of DEX over CEX is obvious: reliability; an intermediary is no longer necessary. Users are responsible for their own funds, not for a centralized platform.
How does this technology originate?
The decentralized cryptocurrency exchange DEX, meant the decentralization of the four basic elements of trading: capital deposits, token exchanges, transmission orders and order matching. The first decentralized exchange was Blocknet, which, recognizing the importance of full decentralization, decided to launch a protocol for interoperability of the second layer of the blockchain. This protocol provided the basis for truly decentralized trading, applying the original Bitcoin principles.
That is, DEX enabled decentralized exchange of assets, communication between blockchains and monetization of services. All while maintaining openness, transparency, integrity, and a high level of decentralization. Blocknet has evolved with the needs of society. The usefulness of a decentralized cryptocurrency exchange forced manufacturers to launch a tool adapted to smartphones. The first dApp built on the Blocknet protocol – Block DX – was extremely popular and started another trend in application programming.
On which platforms is DEX most widely used?
DEX usage has grown significantly with the development of decentralized finance. If the trend continues, we are likely to see more and more technological innovations across the industry. In May 2020, Ethereum fully demonstrated its usefulness in the market as a decentralized, zero-trust, censorship-resistant platform for executing smart contracts and thus as a basis for decentralized applications (DAPP). Ethereum’s success is proven, and it is one of the most widely used DEX platforms.
But not only Ethereum is one of the platforms where DEX are of great use. These are some of the most widely used decentralized exchanges where you can make your cryptocurrency investments:
- Pancakeswap: this is the most popular DEX on Binance Smart Chain with the ability to earn CAKE.
- Uniswap: this decentralized exchange runs on the Ethereum blockchain and allows automated transactions through smart contracts.
- Sushiswap: an experimental clone of Uniswap that introduced the SUSHI token.
- Venice Swap: the best and secure decentralized exchange platform.
How is it different from previous platforms?
Centralized exchanges are managed by a specific for-profit company or individual. The management of the exchanges is responsible for protecting user data and trade information, fully controlling the operation of the platform, and independently making decisions that are important for the development of the project. Unlike decentralized exchanges that are managed automatically or semi-automatically with the participation of platform participants in the process of making important decisions.
DEX platforms provide the technical possibility of direct interaction between participants and use a distributed ledger (blockchain) to store and process data. In other words, centralized exchanges are managed by specific individuals to make money from this activity. They are responsible for all decisions on company policy as well as functional content. Decentralized exchanges are governed and accept all changes by a general vote of the participants on the trading floor.
How does it work?
When trading on a DEX platform, the site generates a unique login key that will be valid for a certain period, after which the key becomes inactive. After logging in, the user can perform the exchange. On DEX transactions are carried out according to the PLUG & PLAY concept, i.e., everything happens here and now, without the need to connect a cryptocurrency wallet to the platform or transfer the required amount to the exchange deposit.
The DEX acts as a platform where the parties meet, agree on the terms of the exchange, and conduct a transaction. Through trade orders, users indicate a trading pair and a rate, after which the system automatically compares this data with other orders and, if a match is found, makes a deal. If the trade does not go through on the spot the transaction can be made using a two-way escrow. This is through a smart contract that accepts assets from both parties and then performs the exchange.
What are the advantages of using it?
Most of the strengths of DEXs stem from their distributed architecture and the absence of a single control center. Here are some of the main advantages:
DEXs provide complete anonymity to the user. Therefore, there is no risk of losing money through hacking or a complete collapse of the exchange itself.
A decentralized exchange has no single point of entry through which all assets and data can be accessed, which makes it difficult for hackers and renders the attack itself meaningless.
The decentralized exchange has no personal accounts, no verification is required, and no email needs to be specified. Therefore, no one can use or steal users’ personal data.
DEXs have no management interested in manipulating prices within the exchange. And there is also no way for the authorities to close or freeze your account.