Decentralized Exchanges (DEXes) – are a new technology that facilitate cryptocurrency trading on a distributed ledger. The meaning of «decentralized exchange» is that instead of the one platform that process trades, it is engaged in blockchain.
Cryptocurrencies continues to gain popularity all over the world. Despite it’s high-volatility digital assets has a lot of advantages: anonymity, simplicity of cross-border payments, and of course decentralization. But traders still have to use cryptocurrency exchanges which is extremely centralized. In future world of digital money and peer-to-peer transactions you still have to trust your money to the third part. That’s why decentralized exchanges or DEX was created and developed within last few years.
What is DEX?
The meaning of «decentralized exchange» is that instead of the one platform that process trades, it is engaged in blockchain. How can a blockchain be an exchange? In fact, it is a network of computers that work as one computer. That’s how we receive decentralized market on blockchain.
Bitcoin blockchain, for exmaple, is essentially a single distributed ledger at a lot of computers that performs the task of calculating payments in its journal (transactions) and distributing rewards to those who give their computing power to the network (mining). More advanced blockchains can, in addition to payments, execute entire programs at the user's request. This is smart-contracts. Accordingly, if you can approach the writing of smart contracts, then you can use the whole blockchain as a platform for your application. This application will be DEX – decentralized exchange.
Differences between centralized and decentralized exchanges of cryptocurrency
There are some significant differences beetween traditional cryptocurrency exchanges and DEX. It flows from their main principles of work.
Decentralized exchanges grants full anonimity, which can’t provide their centralized competitors. When you exchange your crypto-assets peer-to-peer, no one asks your identity. Traditional cryptocurrency exchanges have to comply with the law requirements. That means KYC (Know your customer) and AML (Anti-money laundering) laws and full identification of traders. If anonymous trading is available, it has strict restrictions.
2. Control of funds
At centralized exchanges you need to trust your money to the third part. Crypto-exchange control your coins. When using DEX, you make your transactions directly, peer-to-peer, witbeyond some servers. Funds are in users hands.
Trading on traditional platforms you rely on platform in transactions authentification. Company provides you trusted services. When you use decentralized exchange, smart-contracts and blockchain mechanism helps you to get checled transactions.
4. Hacks and servers downtime
It’s logical – usual exchanges do their operations on their servers. And they can be hacked, what happening frequently. Or big popularity and big quantity of new traders may cause to server downtime. We already saw it in December 2017, when bitcoin rally led to problems at all main exchanges. DEX just can’t have such problems – because they don’t have one (or even ten) servers. All participants are servers and if someone is hacked, system will not notice a loss of one «warrior». DEX is impossible to hack or downtime.
5. Source of code
A decentralized exchange (DEX) is a marketplace for investments that is totally open sourced. Nobody is in control at a DEX. Centralized exchange is private-owned company so they no need to open their code and nobody knows completely what algorythms and technologies it uses.
Trading on DEX you do everything by your own – trading, carrying the funds, etc. Centralized exchange is like brokerage company – you give them your coins and exchange does most of the work.
How decentralized exchange works?
The basis of DEX algorithm is possibilities of decentralized network (peer-to-peer). That’s why all members in the same conditions: you could be a trader and a server at the same time. P2P-exchange provides an opportunity to perform all trading operations without intermediaries. This «business» has open source code and no control. Decentralized exchanges gives you full control over private keys of digital storage. The user will not have to trust someone else and worry about the safety of his cryptocurrencies. Trading take place directly between participants, the infrastructure of the exchange uses computers of all users without a single center.
Advantages of decentralized exchanges
- Quick access – no need to register or verificate an account.
- Peer-to-peer – no one can stop or control the trading.
- Cheap and faster transactions – operations is direct, you don’t need to wait for exchange and to pay fees.
- Security – the exchange does not hold your funds.
- Comfort – most DEX provide integration with reliable hardware wallets.
- Privacy – no one except traders can see personal data, which is kept locally.
- Security – encryption and exchange is available through the Tor proxy.
- No manipulations – noone can create fake orders or market volume to activate the trades.
Disadvantages of DEX
- Low popularity – centralized exchanges are more popular and has the biggest volumes of trading, that makes DEX not so good, because of low volumes and lack of orders.
- No insurance – when you exchange your assets by yourself, noone can help you if you lose it by some reasons.
- Not all services – there are no margin trading service or stop and loss, as a lot of services, providing by centralized exchanges.
- No customer service – usually you can’t contact someone if you have a problem.
- High cost – if fees will be high it could be expensive to trade, because you need to pay fee to miners to end the deal.
- No fiat – decentralized exchanges exists only in blockchain and it’s only for cryptocurrencies.
- Complicated to use – DEX is a tool for experienced cryptocurrency owners. It is hard to use and you need to know a lot of in crypto-trading.
Decentralized exchanges list
There are a lot of projects, which called them as DEX.
This is a decentralized exchange «Ethereum-like», where anyone can create their own company. Decentralized cryptocurrency exchange BitShares 2.0 based on the principle of the work of smart contracts, and also uses Graphene as programming language of the platform.
As a reference currency, the exchange uses BTS. The developers claim that their service is capable of processing 100 000 transactions per second. Among other improvements, users can interact with the digital platform on an intuitive level: simple names are used, not random combination of digits and letters. You can trade on the exchange through a browser or with special software for all OS.
Waves decentralized exchange is a new platdorm launched on Waves Platform, an international blockbuster platform that gives innovative solutions for businesses, organizations and traders. The main difference from traditional platforms and early decentralized exchanges - on Waves DEX users can trade any pair of tokens directly without transactions through an intermediate currency or to do any other actions. According to the creators, the exchange will seriously compete with existing platforms in terms of speed and safety, despite the fact that all data are recorded in the blockchain in case of security. Matcher technology, which is equipped with the system, means that applications are negotiated in real time. This is a great advantage for users - participants do not need to wait for the next block to find out whether the deal was successfully completed or not.
0x is an open protocol for DEXes based on the ethereum blockc-chain. One of the main goals of 0x is to become the basic «building» block, which can be used with other protocols and create complex of decentralized applications. This should make the purchase and sale of ethereum-based cryptocurrencies cheaper.
The ZRX Token provides the operation of the system and allows users to manage it. It is used by users that store and maintain the calculation of orders. Another purpose of this cryptocurrency is to support the decentralized management of 0x ecosystem. Users 0x vote for changes in the protocol with ZRX.
EtherDelta is a cryptocurrency DEX that specializes in tokens of the ERC20 standard. Trading fee is 0.3%, the remaining activities are free. There are small fees for entering or withdrawing funds. But this fee is not a profit of exchange – it’s used for paying miners for their work.
To be able to trade on the EtherDelta platform, you need to register a Metamask purse - it's an easy full-fledged client that will act as an intermediate store between the wallet and merchants. Unlike standard online wallets, all private Metamask keys are stored on your PC.
Kyber Network (KNC) is a decentralized exchange and payment service. It is an online protocol that makes it possible to instantly exchange and convert digital assets and cryptocurrency with high liquidity. KyberNetwork will be the first system to implement several convenient operational exchange functions, including reliable, decentralized execution, instant trading operations and high liquidity. In addition to being a stock exchange, KyberNetwork also provides payment APIs that will allow Ethereum accounts to easily receive payments from any users. Any merchant can use KyberNetwork APIs to allow users to pay in any cryptocurrency, while merchant will receive payments in Ethereum (ETH) or other selected coins.