Decentralized Exchange (DEX)
It is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. This is online and is secure without any intermediary. Even though the centralized exchanges are in cryptocurrency dominance, the decentralized exchange is getting highlighted these days. The protocols are different for different DEXs. Some use emergent liquidity while others order book models. Many developers are still in search of other protocols to address the disjointed liquidity.
The advantage of this decentralized exchange is that you can use any of the coins you have for trading. It means, there are more than 5000 coins and you can use any for the trading of the asset. The decentralized exchange is offering all the features of centralized exchange but with a difference which is why it is considered to be the future trading exchange.
In the centralized exchange, buyers and sellers have to maintain a crypto wallet through which then can carry out the transactions. The transactions being sensitive, can be vulnerable to hacking or stealing the power structure.
Considering a DEX, it can be made easy to transact. It accommodates all coins you use for trading without any cost of operation. Since DEXs work on blockchain technology, these are called open source. There are few new blockchains such as Solana and Cardano that feature high speed, full-on capacity, and low transaction costs. This is why DEXs is a popular trading platform.
Advantages of DEXs which sets them apart from other exchanges
In a traditional stock exchange, you need a ‘trading account’ to store the funds for buying the stocks or to receive the funds when you sell the stocks. In centralized crypto exchanges, the trading account is an e-wallet offered by the exchange. Given the cyber-security risks, holding an e-wallet on a centralized exchange is full of counterparty risks.
A trading account is needed for the traditional stock exchange to put up all the funds for buying and selling the stock. An e-wallet is offered in a centralized crypto exchange for buying and selling purposes. But an e-wallet is full of counterpart risks. In a decentralized exchange, you do not need an e-wallet for transactions. this means, you are holding control over your asset and this is why it is out of risk of hacking or stealing.
The private key you use for your e-wallet in centralized exchange is recorded in the exchange server which is not safe in terms of routine operation. But in a decentralized exchange allow us to use an external wallet for trading purpose. Your private key will not be registered on the exchange server and hence your fund will be controlled by you alone.
Compared to a centralized exchange, the decentralized is cheaper in terms of transaction costs. The centralized exchange has to go through the setting and maintaining costs to secure user’s wallets. Decentralized exchange operated on a cost-effective service. Since blockchain technology offers reduced transaction costs, it is customer-friendly.
How does this DEX work?
As I have told you earlier, there are many types of DEXs out there. Let’s take the one like Order Book and let’s see how it works. This is similar to a conventional centralized exchange. The order book will record all the transactions of buying and selling of a particular asset. The depth of the order book depends on the spread of the prices which prevails the market price.
During the trade, the order book in DEX holds the information on-chain (on the blockchain network) while your funds are still on off-chain (not in the blockchain network). The financial instrument which is specialized in DEXs will execute this in the decentralized pattern. These financial instruments are the key factor for the working of a decentralized exchange.
Let’s learn a few of them here.
Nash Exchange: This decentralized exchange had launched in the year 2020 which is known as Defi year. This exchange aims to provide customers with a fast, simple, and safe transfer of the assets without any intermediary. Not only the speed and functionality of this impress customers but also the security benefits it provides.
Most crypto traders believe desktops to be good for trading because the trading chart display is easier. But few traders do not require desktops for trading but rely on mobile phones. The Nash exchange allows traders for trading via mobile phones through their mobile application, both for iPhone and Android.
Due to the Securities Exchange Commission of the US, many of the exchanges cannot have US investors on their platform. But Nash is a US-investor-friendly exchange.
dYdX: dydx is one of the most popular decentralized exchanges which offers spot trading, margin trading, perpetual trading, as well as lending and borrowing. This runs on the Ethereum blockchain and accepts trades without intermediaries.
TomoDEX: TomoDEX is launched by the TomoChain blockchain which is integrated with the consensus layer. Time and resources are saved while trading on TomoDEX. No third-party affiliate and hence resources are directly into the platform.
ViteX: ViteX is developed under Vite public chain which offers high performance, speedy transactions, zero transaction cost, cross-chain gateway, etc.
Binance DEX: This exchange is developed by Binance company with Binance Coin (BNB). Users can enjoy lower fees, improved security with this exchange. Often, experienced crypto users prefer this exchange. This exchange allows customers to trade in the listed assets distributed by Binance’s blockchain.
Loopring Exchange: This exchange is developed with a layer-2 Loopring zkRollup protocol that offers faster and cost-free transactions on Ethereum. The application of zkRollup protocols offers users to enjoy low fees while holding their digital assets with them at all times.
DDEX: DDEX is a decentralized exchange that is US investor-friendly and also, mobile-friendly through its application. This attracts traders for its security and low-cost transactions.
These are some of the sets of order book decentralized exchanges. Many other exchanges use swaps that are considered to be the new era platform. Some of them are Curve, Uniswap, SushiSwap, DODO, Balancer, Bancor, Kyber, and Gnosis.
The evolution of decentralized exchanges has made a quite big difference in the financial sector and mainly in the crypto world. The liquidity protocols are much better than the order book protocols. These developments are accelerating the financial world ahead.