Do you already now what decentralized exchanges are? Exchanges have played a crucial role in matching crypto-currency buyers with sellers since the early days of Bitcoin. We would have much weaker liquidity and no way to settle on the correct price of assets without these forums attracting a global user base.
Centralized players have, historically, dominated this area. However, an increasing number of tools for decentralized trade have emerged with the rapidly expanding stack of technologies available.
Decentralized exchanges (DEX) are a type of cryptocurrency exchange that allows for secure online direct peer-to-peer cryptocurrency transactions without the need for an intermediary.
To help improve Ethereum’s scaling problems, the decentralized exchange provides centralized databases, called Relayers. Until communicating with Ethereum’s blockchain, relayers mediate activity amongst users. For example, this could be matching orders between traders.
What are Decentralized Exchanges?
Typical third-party agencies that would usually control the security and transfer of assets (e.g. banks, stockbrokers, online payment gateways, government departments, etc.) are replaced with a blockchain or distributed ledger in transactions made by decentralized exchanges. The use of intelligent contracts or order book relaying are some typical methods of operation, although several other variants are possible and with different degrees of decentralization.
Decentralized exchanges, without the sign-up hassle, are like that. There’s no crypto depositing or withdrawing in most situations. The exchange happens directly between the wallets of two users, with a third party’s minimal (if any!) feedback.
To get the hang of, decentralized exchanges may be a little trickier, and they might not always have the assets you want. But these can very well become integral components in the cryptocurrency sphere as the technology and interest in it develop.
Decentralized exchanges present a challenge to centralized exchanges of cryptocurrencies. BitMEX, the world’s largest exchange of Bitcoin (BTC) derivatives by value, has recently received charges for its senior team. This sent shock waves across the industry and resulted in a huge pullout of coins from the centralized exchange wallets. People worried that other exchanges will be punished and, as a result, since November 2018, the amount of BTC sitting in exchange wallets has plummeted to its lowest value.
Another popular decentralized Bitcoin exchange is Bisq. It enables users to swap Bitcoin for national currencies without any identifying details needing to be disclosed. It is an open-source desktop application that developers all over the world have developed and maintained.
Another DEX is called Airswap Protocol from the Ethereum family. For traders to begin trading, Airswap does not require any identifying details, nor do they charge fees.
There are, indeed, many parallels between Airswap and 0x, but the broad range of Ethereum-based approaches to DEXes can be made clear by analyzing their differences.
Advantages of Decentralized Electronic Exchanges of Trading
The biggest gain and the most fundamental explanation why cryptocurrency exchanges need further decentralization is because it improves protection.
Decentralization of Servers
Another important note here is that, true to their design, most decentralized crypto-currency exchanges do not even have a centralized server. They are distributed around the world on different servers. This means that user data stays protected and that the exchanges are far more difficult to hack than conventional, centralized exchanges of cryptocurrencies.
Most centralized exchanges of cryptocurrencies will require a user to register and provide personal information such as proof of identity and e-mail ID, phone number, etc. More personal details, such as passports, is also required for certain exchanges.
How a Decentralized Exchange Works?
In some ways, but substantially different in others, DEXs are close to their centralized counterparts. First, let’s remember that users have a few different kinds of decentralized exchanges accessible. The common theme among them is that on-chain (with smart contracts) orders are executed and that users at any stage do not sacrifice custody of their funds.
Some work on cross-chain DEXs has been done, but the most common ones concentrate on assets on a single blockchain (such as Ethereum or Binance Chain).
On-chain order books
All is done on-chain in several decentralized exchanges (we’ll talk about hybridized methods shortly). Each order is written into the blockchain (as well as alteration and cancellation). This is arguably the most straightforward solution, because you do not trust a third party to give you the instructions, and there is no way to obfuscate them.
Off-chain order books
In certain ways, off-chain order book DEXs are still decentralized, but are admittedly more centralized than the previous entry. They’re hosted somewhere instead of any order being posted to the blockchain.
Automated Market Makers (AMM)
Fed up of reading the term “order book?” Great, because the Automated Market Maker (AMM) model does away with the idea altogether. It doesn’t require makers or takers, just users, game theory, and a bit of formulaic black magic.
Best Decentralized Exchanges
For modern traders, DexGuru is a trading platform where on-chain research is combined with trading capabilities.
DYdX is a crypto asset trading platform developed with open-source protocols, allowing for decentralized margin trading. Antonio Juliano’s interview with dYdX – Decentralized Forum for Advanced Financial Products
In order to prevent high price slippage, 1inch.exchange split the order into many decentralized markets including UniswapExchange, KyberNetwork, Bancor and RadarRelay. 1-inch CTO Interview
Atomex allows users to exchange Bitcoin, Ethereum, USDT, and Tezos safely and anonymously through its own desktop wallet and also provides integration with low-level APIs. Atomex co-founder’s interview.
Uniswap operates on the Ethereum blockchain and is a leading decentralized crypto exchange. On centralized exchanges such as Coinbase and Binance, the overwhelming majority of crypto trading takes place. These platforms are regulated by a single body (the organization that runs the exchange), require users to bring funds under their management, and to promote trade by using a conventional order book system. Order book-based trading is where buy and sell orders, along with the total sum put in each order, are displayed in a list. The number of available purchase and selling orders for an asset is referred to as “market depth.” A purchase order needs to be paired with a sale order on the opposite side of the order book for the same amount and price of an asset in order to make a profitable transaction using this mechanism, and vice versa.