What is a DEX? And How A Decentralized Exchange Works?

Because of the rise of investment in altcoins from 2017 to 2020, large no users have started trading in cryptocurrency. As a result, a large no of development has appeared in innovative exchanged platforms to fulfill the needs of cryptocurrency users.

However, using centralized exchanging risk factors increases investors with billions of dollars lost in hacks and scams, especially in ethereum and bitcoins each year. Also, in centralized exchanges, you have to share your personal information. In recent years people started using decentralized exchanges to solve these issues.

What is a decentralization exchange?

A decentralized exchange (DEX) is an exchange that allows you to trade without storing your funds and sharing your personal information in its server, and you can buy or sell your assets with matching bids on this platform. In this platform, you can directly trade with the seller or buyer without the help of any agent. There is no need for the agent; both participants can trade (peer to peer).

Uniswap, BurgerSwap, PancakeSwap, MDEX (BSC), and SushiSwap are the most popular DEXs. These decentralized exchanges have a daily volume of $4 billion.50% is the market share of these decentralized exchanges. Looking at the rise in numbers of investors in decentralized exchange, we can predict that this transaction volume will only increase for a long period of time.

Check out the best DEX exchanges.

How decentralized exchange works?

Types of decentralized exchange are written below:

BOOKS ON-CHAIN ORDER

In books of on-chain order, all the records are maintained by assigning network nodes. Miner operations are also required to complete each transaction.

Bitshares and stellar team exchanges are the most known platforms that use on-chain order books.

BOOKS OFF-CHAIN ORDER

In books off-chain order, transaction records are kept in the centralized entity. These order books are managed with the help of Relayers. According to this, the off-chain order book is quasi-decentralized and is not like other types of DEXs.

EtherDelta, Ox, and Binance DEX are examples of using off-chain order books.

AMM (Automated Market Makers)

Automated Market Makers (AMM) became famous in 2020 because of the DeFi boom. Uniswap, SushiSwap, and Khyber Network are the DEXs platforms that use AMM. Order books are not needed in AMMs. Liquidity pools are formed by utilizing smart contacts that execute trades based on specific parameters.

Pros of DEXS

Security, Privacy, and Sovereignty are the pros of DEXs

SECURITY

There is a big chance of hacking while using centralized exchanges. In the past, hacking in centralized exchanges has devastated the crypto industry and has broken people’s trust. A loss of $530 million worth of theft alone by Coincheck broke the previous record of $472 million by Mt. Gox.

Thieves and hackers target centralized exchanges because of their custodial nature. The agent’s involvement in centralized exchanges raises the chances of the scam as the fund is not transferred by one trader to another directly.

In decentralized exchanges, the trader can directly trade with the buyer or seller, and the trader transfers his funds directly without the involvement of any agent. In simple words, the one who maintains the security of the trader’s account is the trader itself.

PRIVACY

To comply with understand Your Customer (KYC) requirements, all centralized exchanges require sign-ups. This sign-up requires the personal information of the cryptocurrency holder.

As there is no agent in DEXs, most of the DEXS don’t apply KYC protocols. While trading on DEXs, there is no need to share your personal information; however, some rumors are saying that DEXs will also start using KYC protocols from 2021.

SOVEREIGNTY

In centralized exchanges, your funds are transferred through an agent, but you have all the authority over your funds in decentralized exchanges, and you will be able to use them as you want. Exchanging freezes and blocking withdrawals rarely happened in decentralized exchanging.

Cons of DEXS

With the pros of DEXs, there are also some cons of DEXs that are necessary to go through before deciding which exchange to use.

TRANSACTION SPEED

DEXs processes the order slowly. This is because, first of all, trading calls are broadcast, and after the confirmation of miners, they are processed. That’s why transaction speed in decentralized exchanges is less than in centralized exchanges.

Decentralized exchanges vs. centralized exchanged

Centralized exchanges have better transaction speed than decentralized exchanges, but the greater privacy policy, lower fees, and acceptance of payment in decentralized crypto exchanges are more popular than centralized exchanges in the past couple of years. In decentralized exchanges, users have full control over their funds as there is no third person in the trade, while in centralized exchanges, there is an agent through which you have to transfer your funds.

In centralized exchanges, there is a high risk of hacking and fraud than decentralized exchanges. Decentralized exchanges are less expensive to maintain than centralized exchanges.

DEX development

In some past years, the decentralized exchange has developed the most from all the exchange platforms because of its better policies than other exchange platforms. After the Bull Run in 2017, because of the significant investment in altcoins, decentralized exchange development started. After that, the number of investors in DEXs increased at a very impressive speed. The present era of exchange platforms is the era of decentralized exchange.

Conclusion

The creation of decentralized exchanges provides better security, more privacy, proper control on the funds, and better convenience to the user. Decentralized exchanges are also less expensive to maintain as compared to centralized exchanges, but the transaction speed of decentralized exchanges is slower than centralized exchanges. These are the reasons why the number of users of decentralized exchanges has been risingrising very quickly in past years. However, it’s necessary for the user to understand that decentralized exchanges are much better than centralized exchanges but do not solve every problem that occurs in centralized exchanges. DEXs are not the silver bullet of exchange platforms and have issues of their own, but with DeFi involved quickly, these issues will dissipate over time.