What is a Decentralized Exchange (DEX)?
An online peer-to-peer service termed as a decentralized exchange is the one by which direct transactions of cryptocurrency are allowed between two parties involved in the process. The aim of decentralized exchange (DEX) is to solve the inherent problems of centralized exchanges. They directly develop the p2p markets on a blockchain, allowing independent operation and storage of funds by the traders. The supervision of decentralized services either takes place by participants or automatically. The DLT or distributed ledger technology provides assets safety. The blockchains that are generally utilized for decentralized exchanges are Graphene, Ethereum or those powered by the other cryptocurrencies.
In the exchange market, the decentralized exchange is not a third party service dependent for holding funds of the customer. In place of this, the occurrence of trades takes place directly among the users with the help of an automatic process. Assets or proxy tokens could be created for establishing a system of such type. Another solution for this purpose is using the escrow multi-signature decentralized system.
How are they different from Centralized exchanges?
In a centralized model of exchanges, funds are deposited by the users and an IOU is issued by the exchange whose free trade is possible on the platform. When funds withdraw request is made by the user, their conversion is done again in cryptocurrency that was represented by them and then these are provided to the owner. This contrasts with the operation of a decentralized exchange. Smart contracts are used by decentralized exchange for autonomous operation. No third party requirement is there in DEX smart contracts since it allows direct trade to sellers and buyers. Blockchain’s decentralized spirit is maintained through this.
Even though nature is decentralized in terms of trades, centralized authority is still there for DEXs by which its entire operations are supervised. For assisting the decentralized trades, dApps are required and being complicated in nature, they are written with the help of developers’ team. A fee is also charged by DEX for utilizing the exchange, but this is comparatively less than the counterparts.
A higher technical development degree is required by centralized exchanges when compared to the DEX before new coin could be integrated safely in the exchange.
The amount of technical expertise desired in DEX is also high for intimidating and using the new to digital currencies. Some of the features that are oriented to customer service and user friendly which is not there in decentralized exchanges as in the case of centralized exchanges.
ADVANTAGES OF DECENTRALIZED EXCHANGES
Being the best in their nature, a centralized server is not there in most of the decentralized exchanges of cryptocurrencies. Their storage takes place athwart several servers having locations spread in the world. This assures for the safety of the user data and also that hacking of the exchanges is much more complex in comparison to the centralized and traditional exchanges of cryptocurrency.
This is not just the greatest advantage of a decentralized exchange but also serves as the reason behind the demand for increased decentralization in the exchanges of cryptocurrency since security is enhanced with this. Users are able to get better security with decentralized exchange since third party service is not thereby which their currencies are stored and total control of cryptos security lies in the hands of the users.
A user is needed in most of the exchanges of centralized cryptocurrency for the purpose of signing up and offering some of the required personal details including e-mail ID, identity proof, phone number, etc. In the case of DEXs, no such demand is there. A user might be asked for signing up in most of the platforms of DEX but no such personal information is demanded by them.
The exchanges and cryptocurrency are suffering from strict laws imposed on them in several countries. The banking embargo is also issued in certain countries on the businesses of cryptocurrency. To this hostility of the government, the best solution decentralized exchanges offer is peer to peer networks as their location is not restricted to a single place and therefore could not be outlawed or banned.
DISADVANTAGES OF DECENTRALIZED EXCHANGES
Usually, there is anonymity in case of decentralized exchange ownership since they are generally used for avoiding the sanctions of regulations. This is not a concerning factor for the users who are there for years as a part of crypto-culture.
Not friendly for beginners
This is the major drawback of DEXs and is especially true for the user who has just entered into the cryptocurrency world and has everything new. The platforms of DEX can serve to be somewhat overwhelming, but changes are foreseen in this for good.
Awareness of public
This disadvantage is not permanent but has to be mentioned since users are seriously lacking awareness regarding DEXs. While several users are there in the case of centralized exchanges, there is still much for decentralized networks to achieve.
How are Decentralized Exchanges the future of Decentralized Finance (DeFi)?
The concept of decentralized exchanges is relatively new and has to do much for becoming the mainstream. However, when the way of the progress of markets is looked at, it reflects that strong chances are there for the DEXs in the future to become the norm. With the increase in awareness among users of this peer to peer system that allows more secure methods for the transactions, the popularity of DEX will witness continuous growth.
Considering it all in simple terms, it would be better to say that DEXs are better in line with the core concept of cryptocurrencies. However, it might take some time for the user to be habitual of this new system since they are used to the concept of centralized exchanges. At present, it could be said that decentralized exchanges can serve to be the future of decentralized finance with more progress in their popularity and certain improvements that are needed in this system. There are several options that could be provided to the users with decentralized exchanges and therefore the popularity just demands the desired growth.