What is Decentralized Exchange (DEX)?
The events that led to the creation of this system among many others was the 2008 global financial crash. This was caused by the creation of a debt-based economy when private banks were lending to the government at interest. All of these were reasons for a direct peer-to-peer transaction system. One of the services of this system is the exchange. Under this is where we have a centralized exchange and the decentralized exchange.
The centralized exchange allows for a third party to regulate transactions, they provide advanced trading functionalities, represent a security risk for your fund, and most importantly, they make it very easy to use. But a decentralized exchange is pretty much different. In simple terms, a decentralized exchange is a cryptocurrency exchange that operates in a way that is decentralized which further means that it has no central authority. As a result of its decentralization, it supports a peer-to-peer method of trading cryptocurrency.
A decentralized exchange system is made to allow a direct transaction among users without the interference of authority and this is made possible when a proxy token or asset is introduced to the system.
How Do Decentralized Exchanges Work
This segment is in two parts, the first is where orders are made and the second is how to make orders.
Talking about where orders are made, in decentralized exchanges, trading is done either on-chain (mostly Ethereum) or off-chain. Meanwhile, most trading today is done on the Ethereum blockchain. Order on the decentralized exchange is done in two ways, the order book traditional model, or the model of the automatic market maker (AMM).
What is Automated Market Maker
Automated Market Maker is an effective replacement for the traditional order-book, they are smart contracts that create a liquidity pool of ERC20 tokens then algorithm instead of order book trades them automatically.
Types Of Automated Market Maker
There are different types of AMM but we take a look at the popular ones.
The liquidity pools of the Kyber network are done either by the team of the project or by professional market makers, they are not opened to everyone for liquidity.
Kyber network is one of the earliest sets of AMM and its token price in the liquidity pool can be set externals or be determined by the parameters of a smart contract automatically. The features of the Kyber network include;
1.Automated price reserves
2.Fed price reserves
This was the first truly decentralized automated market makers introduced to the market. Uniswap, unlike the Kyber network, allows for anyone to liquidate a pool.
The price in the smart contract can't be controlled and the balance ratio determines the price of the token in the pool. The features of Uniswap are;
1.It enables users to earn trading fees
2.It's liquidity pool consists of two pairs, ETH/TOKEN and DAI/TOKEN.
Balancer is the newest of AMMs functions like Uniswap but it has more amazing features that let it have more than one use case outside of a simple liquidity pool. Its features include;
3.Custom pool ratio
This is also a new protocol that entered the ecosystem earlier this year. It has a feature that allows for the only stablecoin which fast tracks the completion of a large trade. Its features are:
1.Stable coin only
2.Small deposit bonus
Advantages Of Decentralized Exchanges
Unlike a centralized exchange in which users all have their currencies stored in a certain server by the third-party service, a decentralized exchange is void of that.
Users will have to lock in their currencies in their wallets and transact directly from their wallets.
This ensures that hackers won't be able to penetrate and hack a network where there is billions worth of currencies belonging to so many people as they did in the Coincheck hack of 2018.
Decentralized exchanges ensure that your privacy isn't compromised. Totally different from the stress you go through in banks or centralized exchanges in which various forms are handed to you to be filled, those forms asking so many personal questions which shouldn't be.
In a decentralized exchange, it is the opposite as no one will request for all that. The only people that can have access to very little information about you are those you transact with.
Just like the system, decentralized exchanges do have a decentralized server. The servers are located at different locations around the world so as to secure the transactions of users.
Disadvantages Of Decentralized Exchanges
Decentralized exchanges have a system that cannot be easily understood by users, especially those who are just getting familiar with cryptocurrency. Their platforms are overwhelming and not for beginners.
Suspense Over Ownership
Due to the fact that decentralized exchange is usually used to bypass regulations, owners in most cases always prefer to remain anonymous.
Decentralized exchanges though haven't received enough publicity but it sure would be a great idea and a true option for a peer to peer, direct transaction process without a third party or central authority. It boasts of better security than a centralized exchange and it also gives privacy, making you share your information only to those you will like to of trade with.
BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.
BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts, derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.