With the development in the high-tech industries and blockchaintechnology booming stage, decentralized concepts are also becoming popular andof course, demanding one.
In the crypto-verse and blockchain space, decentralizedcryptocurrency trading exchanges are becoming one of the hot topics these days.Even the experts are concluding their valuable thoughts on fintech andbusinesses by appending Decentralized features.
Before initiating the decentralized crypto exchanges and theiruse case in the crypto market, let’s understand the basic meaning ofcentralized and decentralized concepts.
Centralized vsDecentralized Concept
The centralized theory is run on the central or mediator serverwhereas, the decentralized concept doesn’t include any central server for theproceedings. Whereas in the centralized method, objective settings, strategiesimplementation, funding, and others are carried forward by a monitoring authorityor centralized businesses. In contrast, a decentralized method flows directlyfrom one party to another without anyone’s involvement in between.
So, that is how the centralized and decentralized cryptocurrencyexchanges work. Now let’s begin with the concept of Decentralized cryptoexchange and how it works.
Decentralized CryptoExchange
A decentralized exchange (DEX) is a type of cryptocurrencyexchange that operates on a blockchain network. Here, direct peer-to-peertrading of cryptocurrencies takes place, without the need for a centralauthority or intermediary. This decentralized nature of DEXs is what sets themapart from centralized exchanges, which rely on a central server to validateand execute trades. Some of the cryptocurrency exchanges which providedecentralized trading services in the market are PancakeSwap, Kyber, dYdX, andUniswap.
How do theDecentralized Exchanges (DEXs) work?
One of the key features of DEXs is that they allow users to holdtheir own private keys and assets. This means that users have full control overtheir funds and no third party can freeze or seize them. These features of DEXsenhance the security and privacy of the user's funds and trading activities.
Decentralized exchanges are typically implemented using smartcontracts on a blockchain network, such as Ethereum. Smart contracts areself-executing contracts with the terms of the agreement between buyer andseller being directly written into lines of code. They allow for the automaticexecution of trades based on predefined rules and regulations.
All the aforementioned dynamic attributes of DEXs help thecrypto fanatics experience instantaneous trades frequently with lesstransaction fees than on centralized cryptocurrency exchanges.
Types of DecentralizedExchanges (DEXs)
There are mainly three types of decentralized exchanges;Automated Market Maker (AMM), Order Books DEXs, and DEX Aggregators. All ofthese Decentralized Exchanges allow the users to buy, sell, and trade directlywith the advancement of smart contracts.
Let’s look at all three decentralized exchanges and how theywork.
Automated Market Maker(AMM)-
One popular way DEXs are implemented is through the use of anAutomated Market Maker (AMM) algorithm. These algorithms use a mathematicalformula to set the price of assets and can adjust prices based on supply anddemand. The AMM algorithm ensures that the prices of assets are fair andreflective of their true value. Examples of such DEXs are Uniswap, Balancer, orSushiswap.
Order Book DEXs-
Another way DEXs are implemented is by using an order book, itis more or less similar to centralized exchanges. In this case, users submittheir buy and sell orders to the order book, and trades are executed when amatching order is found. This allows for a more traditional trading experience,similar to centralized exchanges. Examples of this type of DEXs are 0x, Kyber,or Airswap.
DEX Aggregators-
Decentralized exchanges (DEX) employ a variety of protocols andtechniques. Higher security and autonomy are the results of this dynamic, butit also leads to inconsistent platform-to-platform liquidity. This lack ofliquidity can be a deterrent for institutional investors or wealthy independenttraders who want to purchase a select crypto asset in large volumes. To addressthis, DEX aggregators have developed tools to deepen asset liquidity poolsacross centralized and decentralized crypto exchanges.
Examples of this type of 1inch exchange and DiversiFi.
Advantages ofDecentralized Exchanges
DEXs have several advantages over centralized exchanges. Asmentioned earlier, since users hold their own private keys and assets, there isless risk of hacks or breaches resulting in the loss of funds. Additionally,DEXs offer increased security, privacy, and decentralization, since there is nocentral point of failure. It also allows for more freedom and fewer regulationsas they are not bound by the regulations of a central authority. However, thereare also some limitations and challenges associated with DEXs. One of the majorchallenges is low trading volumes and liquidity compared to centralizedexchanges, which can make it harder to execute trades and make a profit.
In summary, decentralized exchanges offer a new and innovativeway of trading cryptocurrencies, with added security and privacy benefits. Theyoperate on a blockchain network, using smart contracts for the automaticexecution of trades. DEXs can be implemented using an automated market makeralgorithm or an order book, and offer a wide range of advantages overcentralized exchanges. However, they also have their own limitations andchallenges, and it is important to be aware of these before deciding to tradeon decentralized exchanges (DEXs).
By Riteshu Sen Jaiswar
