Review: Decentralized Exchanges (DEX)

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Decentralized exchanges are platforms where cryptocurrency users perform crypto-related transactions. There are a lot of different decentralized exchanges that promise different features. In this article, we will be looking into everything about decentralized exchanges and the important things to know about them as crypto enthusiasts. 

What Is A Centralized Exchange? 

Centralized exchanges involve the use of intermediaries during transactions. It can be likened to the use of middlemen or third-party interference during transactions. There’s nothing wrong with all centralized exchanges – the only downside is that they don’t offer the speed and privacy that decentralized exchanges offer.

What Is A Decentralized Exchange? 

A decentralized exchange is one of the tools for transactions in Decentralized Finance (DeFi) without any third-party intervention. Decentralized exchanges allow peer-to-peer (P2P) transactions that are built on a blockchain technology known as Smart Contract. They are automated systems that enforce agreements between people without an intermediary getting involved. Through smart contracts, two people can be connected on the exchange platform via the internet. Although, not all decentralized exchanges have the same features. Examples of decentralized exchanges include Bartardex, Nash, Waves DEX and IDEX, etc.

What Makes Decentralized Exchanges Unique?

The main feature that makes DeFi unique is privacy and anonymity. Most cryptocurrency users really value this because normal centralized exchanges always require documentation for the completion of the KYC process. This privacy and anonymity provide:  

  • No security risks 
  • Less chance of identification and information theft 
  • No Infrastructure risks
  • Less chance of banking information theft
  • Low risk of Government shutdown

How Does A Decentralized Exchange Work?

Decentralized exchanges, also known as DEXs, have similar working principles to centralized exchanges. Although similarities do exist, there are also significant differences.  Firstly, it is important to know there are different types of decentralized exchanges in the cryptocurrency community. They can be grouped according to their working principles as shown below:

On-Chain Order Books

This is the most used system of operation for most DEXs. Every transaction made on the network is recorded as an order which is then recorded on a blockchain. There are network nodes in charge of maintaining the balance and orderliness of the orders. This system of operation is known for its transparency and independence, thus eliminating the function of third parties. Examples of decentralized exchanges that make use of the on-chain order books are StellarTerm and Bitshares decentralized exchanges. 

Off-Chain Order Books

Although some part of the functionality is centralized, it is more fitting to say it is a semi-decentralized exchange. Instead of the use of blockchain for its storage/ledger system, it uses a server hosted from an offline site. This system uses relayers to manage their orders. After the orders are matched, the trades are then finalized on-chain on the DEX. Examples of decentralized exchanges that make use of off-chain order books include Binance DEX, Kraken, EtherDelta and IDEX.

Automated Market Makers (AMM)

Order books have always been the well-known system adapted by so many DEX. All these ended in 2020 when Automated Market Makers emerged; a new system that doesn’t apply the principles of the existing order books. It doesn’t depend on order makers or takers; every one of its activities is generated automatically by utilizing a smart contract system. In this system, there is an automated generation of liquidity pools that execute trades automatically based on some theories, formulas, and parameters. Examples of DEXs that make use of the AMM model include Uniswap and Kyber Network. These models have been widely adopted because they have a user-friendly and easy-to-use interface.    https://twitter.com/officialsubx/status/1460934459788644355?s=20  

Top 10 Decentralized Exchanges 

According to the current rating by CoinGecko, here are the top 10 decentralized exchanges out of the 35 total:  

  • Uniswap
  • PancakeSwap
  • Trader Joe
  • Sushiswap
  • Spookyswap
  • Curve Finance
  • Raydium
  • DFX
  • Ocra
  • Mdex

 

What Services Do the Decentralized Exchanges Offer Its Users?

Decentralized exchanges offer their users options to borrow funds that are used for leveraging their positions. In addition, they permit the lending of funds to passively earn interest or by providing liquidity to collect the stipulated trading fees. 

Pros and Cons of Decentralized Exchanges

Pros:

Privacy Most centralized systems ask for KYC/AML, (Know Your Customer and Anti-Money Laundering). These are usually required because of some regulations which demand proof of identification and address of the user. On all decentralized exchanges, privacy is a prominent feature. Since decentralized exchanges are permissionless, anonymity is the factor that eases users’ worries about information leaks or identity thefts. Although, some DEXs still demand KYC because of some regulations, especially if the order books are centralized.    Cheap maintenance Fees Centralized exchanges need extra costs to set up and maintain infrastructure to keep offering their secured services. Decentralized exchanges have automated and self-regulatory programs which reduce their costs when compared with the former.    Lower risk  Decentralized exchanges are less vulnerable to hacks hence, there are lower risks of incurring a loss of funds and cryptocurrencies. It is more security structured which makes it harder for breeches.   Varieties of Tokens There is the availability of unlisted tokens.   Full control of funds The decentralized exchange doesn’t have business with cryptocurrency wallets and funds.  Every transaction is managed personally by the users. There is no request for deposits or fund transfer to a wallet or trading account. 

Cons of DEXs

  Unforgiving experience  The truth is that with a centralized exchange, there are some exemptions when it comes to user experience. In case of password loss of a centralized exchange, it is recoverable. Whereas, for decentralized exchange, it is unrecoverable if the seed phrase is lost.   Liquidity supply The trading volume and liquidity supply are still fairly low when compared to a centralized network. This might be due to its newness in the crypto community. With time, this problem might be solved if more people choose to trade on the exchange. The liquidity and trading volume are dependent on one another.   Trading Fees Although the trading fee is usually low there are exceptions. In a situation where the chain is congested, the trading fee might be slightly higher. If the DEX also uses an on-chain order book, it might suffer from high trading fees.   Limited pairs Sometimes, the network might not allow you to trade and exchange certain cryptocurrencies for one another because it is not yet listed on the network.    The main goal of cryptocurrencies according to Satoshi is to cancel any form of centralization in finance, that is nullification of third parties. DEX has been trying to satisfy this requirement by creating a remarkable user experience while meeting the requirements of a trading platform. Like in the case of peer-to-peer, which has cared for any form of middlemen, is one of the powerful innovations.    Most centralized exchanges have also been prompted to develop and include decentralized exchange versions on their system because of the flexibility it promises its users. The decentralized exchange is still new in the cryptocurrency community.  With time, it is going to get better with its service while solving the current loopholes it has.   https://twitter.com/UniversalDEX/status/1460876235257565184?s=20  

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Disclaimer: The views expressed in The Coin Times are solely those of the authors cited. It does not constitute The Coin Times recommendation to buy, sell, or hold any investment. Before making any financial decisions, it is recommended that you undertake your own research. Use the information supplied at your own risk. For additional information, please see the Disclaimer.

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