DEX, Explained

A decentralized commutation (DEX) is a peer-to-peer (p2p) online service that allows directly cryptocurrency transactions between two interested parties.

Decentralized cryptocurrency exchanges are aimed at solving bug that are inherent in centralized exchanges. They create p2p markets direct on the blockchain, which allows traders to independently store and operate funds. Users of such exchanges tin can make transactions with cryptocurrency straight between each other — i.eastward., without third-party involvement.

Decentralized services are supervised either automatically or by the participants. The safe of assets is provided by a distributed ledger engineering science (DLT) — in general, mostly the following blockchains are utilized for DEXs: Ethereum (EtherDelta, IDEX, etc.), Graphene (BitShares, CryptoBridge, etc.) or blockchains powered by other cryptocurrencies (Waves, Switcheo, etc.).

Ratio of Centralized Exchanges

How are decentralized exchanges unlike from centralized exchanges?

Centralized — users must exist identified, and their coins are kept in the accounts belonging to companies. Decentralized exchanges do the exact opposite.

Centralized exchanges are managed by a specific company or a person focused on making a profit. Such exchanges are responsible for protecting user data and their trading information. They fully control the platform’southward functioning and independently make decisions that are of import for the evolution of the service.

Decentralized vs. centralized

Decentralized exchanges, in dissimilarity, are managed automatically or semi-automatically with the interest of platform participants in the process of making important decisions. Such platforms provide the technical possibility of directly interaction betwixt the participants and employ a distributed registry for storing and processing all — or nearly all — data. A decentralized exchange does not store funds or users’ personal information on its servers and serves only as a platform for finding matches for the purpose of buying or selling.

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What are the advantages of decentralized exchanges?

Nigh of the strengths of decentralized exchanges stem from their distributed architecture and the lack of a single control eye.

Security: Decentralized exchanges do not store user assets. Therefore, neither hacker attacks nor the total collapse of the substitution can lead to a loss of funds. The absence of a single entry point, through which i could gain access to all assets and data, complicates work for hackers and makes an set on meaningless in itself, which radically distinguishes decentralized exchanges from centralized ones that are regularly hacked.

Low risk of manipulation: Another advantage of this kind of service is the minimal risk of price manipulation or falsification of trade volumes, due to the absence of a central structure that is interested in manipulation inside the substitution.

At that place are no personal accounts on the decentralized exchange, no verification is required and there is no need to even specify an email address, and so personal data of users cannot be stolen. This structure makes services based on a distributed registry more bearding than exchanges that require personal hallmark for the purposes of Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.

Independence from regulators: The distributed architecture protects the exchange from interference by local or international authorities. In the case of a centralized structures, post-obit regulations means that the exchange service can exist either completely blocked or partially, in which case the service becomes express in terms of location or options.

Accessibility for unlike projects: In contrast to its centralized brother, a decentralized exchange makes it possible not only to identify orders for existing cryptocurrencies, only also to create new ones directly in the system. This allows startup projects to provide minimal liquidity, without having to pay high fees for placement on major platforms.

Are there any disadvantages to decentralized exchanges?

The distributed architecture of decentralized exchanges and total user control over their ain funds entails a number of difficulties.

Disability to restore access: For example, due to lack of a KYC procedure and the ability to cancel a transaction in the event of a cleaved passwords or loss of a private primal, the user cannot recover his or her data and render the assets. Chargeback and refund procedures are incompatible with a distributed registry. Users who have committed an performance past error or take lost command over their keys are not able to recover their access.

Small gear up of options: Many options for traders, such every bit stop loss, margin trading or lending, are not available for users of nigh DEXs. Since many decentralized exchanges are managed by smart contracts, cryptocurrencies that practice not support interaction with smart contracts cannot deal on them.

Low liquidity: Decentralized exchanges usually have a much smaller pool of liquidity compared to centralized sites. Thus, while Bitshares DEX has a daily volume of 197 BTC, the same parameter in Binance reaches 227,123 BTC.

Binance centralized exchange volume vs DEX

Such a difference is caused by the fact that traders prefer centralized services, where the selection of instruments, currency pairs and orders themselves are much greater than on a DEX. As a result, the decentralized service falls into the so-called barbarous circle — i.e., there are few users due to low liquidity, while the achievement of liquidity is impossible without a big number of traders.

Scalability issues: An influx of a big number of people who wish to trade cryptocurrencies volition almost inevitably cause a large load on the network and may cause delays, an increase in commissions and all other problems already familiar from stories with centralized exchanges.

No support service: A decentralized exchange, by definition, cannot have a back up service that can handle transactions or user accounts. When choosing such an exchange for trading digital money, the user is fully responsible for their funds and, in the event of losing a private key or sending a wrong transaction, they cannot apply for qualified assist. The lack of advance support service likewise ways that a dramatic increase in the number of user requests may atomic number 82 to difficulties with scalability, and an operator response time may increase in the event of technical problems.

Limited speed: Transactions take time to be checked and confirmed on a blockchain, and the processing time does not depend on the exchange, simply on the miners. Since DEXs are less popular than their centralized analogues, users may confront difficulty finding someone to match their buy or sell orders — or with making a bargain at a skillful price. Buying or selling new currencies or those with low trading volumes can be fifty-fifty more than difficult.

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I accept never used a DEX, but I trade on Bittrex and Huobi. Is it difficult to first?

Decentralized exchanges are more complicated and require studying some technical aspects, which are partially associated with the disadvantages described in a higher place.

The majority of DEXs operate on the Ethereum platform as a decentralized autonomous organisation (DAO) or a decentralized awarding (DApp), which use Ethereum smart contracts and blockchain. This means that transactions must be paid with gas and the user must know what value should be chosen in order for the transaction non to stall and be processed on time.

Top-5 DEX by Market Share

The principles of placing orders are besides somewhat different that what users of centralized services might be used to. The trading system mechanisms communicate between orders in accordance with the queue. All transactions are personally signed by users through their private keys without the participation of the exchange.

Some exchanges effect their ain tokens that perform different roles in the functioning of the system — from paying a commission to investing in a project. For example, on the Waves platform, popular currencies as bitcoin (BTC), ether (ETH) and litecoin (LTC) are traded in pair with the internal asset WAVES, which is also used to pay commissions and other payments.

Users may besides experience slower functioning times when trading on a decentralized site. The reason is a fourth dimension delay between when a blockchain transaction is made and when it is validated.

Can an exchange exist completely decentralized?

Most of the existing exchanges that call themselves decentralized, in fact, are non fully so.

The simple fact is that many DEXs use their ain servers to store trading data and applications for the purchase or auction of user assets, merely the private keys are kept past the users themselves.

Therefore, decentralized exchanges have centralized components that make information technology possible for a government to control how they operate. A notable instance is the IDEX exchange, which prohibits the residents of the state of New York from trading on the platform.

For the same reason, some exchanges may be subject field to hacking and attacks. Charlie Lee, the creator of Litecoin, said that the exchange cannot be decentralized if it can lose or freeze the funds of its customers. The bulletin appeared in his Twitter after the Bancor decentralized commutation was reportedly hacked on July 9, 2022 and lost $13.5 million worth of assets.

A Bancor wallet got hacked and that wallet has the ability to steal coins out of their ain smart contracts. 🤦&zwj;♂️

An commutation is not decentralized if it can lose customer funds OR if it can freeze client funds. Bancor can do BOTH. It'southward a fake sense of decentralization. https://t.co/22UYygIhEF

— Charlie Lee [LTC⚡] (@SatoshiLite) July 10, 2022

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Any dispute settlement process?

The main effect when talking about regulation of DEXs is that, in nigh cases, such exchanges are non controlled past a specific legal entity or individual.

Since DEXs are not required to follow regulations, this results in problems with the determination of those responsible in the event of whatever violation, difficulties with checking trading action or identifying possible infringements. For the same reason, some already existing rules applicable to centralized exchanges cannot be applied to decentralized exchanges.

In the United States, regulators are trying to utilize a legislative base that already exists, and in Singapore, the authorities are trying to create a new regulatory framework for such exchanges. However, there is no unambiguous position regarding DEXs in these countries, while in other countries, decentralized exchanges are non regulated at all.