A cryptocurrency exchange is an online place to trade cryptocurrencies. Decentralized crypto exchanges are one important type of digital exchanges that you should be familiar with if you want to enter the world of crypto.
what is decentralized crypto exchange?
Understanding the concept of decentralized crypto exchanges is in close connection with blockchain and cryptocurrencies. Blockchain is a data recording and reporting system. But the difference it makes is that the data stored on blockchain is distributed among all network’s users and since it uses cryptography to attain a specific code to each block, which is called hash, changing the data is not possible. Also, it’s a decentralized network which means it does not have any admin or central management. You can read the article “what is blockchain?” to learn more about it.
But to define cryptocurrency, we better start with their applications. Via cryptocurrencies, transferring money without any intermediary and completely safe is available. The encrypted digital coin is untraceable and cannot be hacked. It is also not managed by any center authority. I recommend you to read the following article on cryptocurrencies so that you know all about them.
What is cryptocurrency?
You also need to know what is a crypto exchange so you can read about it here.
A decentralized exchange is defined as:
Decentralized exchanges (DEX), are P2P online networks which allow the two parties to have a direct exchange of cryptos.
Decentralized exchanges have come to solve the problems of centralized crypto exchanges. These exchanges offer their customers a P2P market on blockchain so that the traders can independently store and trade the cryptocurrencies. Users of such exchanges can have transactions among them without the need of a third party where the transaction is being controlled by the parties and the security of the transaction is provided with the distributed ledger technology (DLT).
Generally DEXs use limited number of blockchains. For instance, ether delta or IDEX use Ethereum blockchain, where bitshare and cryptobridge use graphen blockchain.
What is DLT technology?
Ledger is a general agreement of the generally shared and reconstructed digital data which is distributed among many sites, countries and organizations. There is no central management or archive.
DLT is a decentralized database which is managed by the users and blockchain is part of it. now let’s discuss its differences with centralized exchanges so that you understand what’s going on.
What is the difference between centralized and decentralized exchanges?
In centralized exchanges, the identity of the users should be proved and their coins are stored on accounts owned by the companies. Decentralized crypto exchanges do the exact opposite thing.
Centralized exchanges are managed by a person or organization which only focus on making profits. These exchanges are responsible for the security of users personal and trading data. They completely control the platform’s functions and decide on future development of the exchange all by themselves.
On the other hand, decentralized crypto exchanges include users in the decision-making process and therefore are managed automatically or semi-automatically. These platforms provide a technical situation for direct transactions between the users and store all the data on a distributed ledger.
A decentralized exchange does not record its users’ personal data on its servers, but only acts as a platform to find cases matching your criteria.
The advantages of decentralized crypto exchanges
Most of decentralized exchanges’ power stem up from their distributed architecture and absence of a central management. We can name the followings as the advantages of such exchanges.
Decentralized exchanges do not store users’ assets so if they are attacked by hackers, or even if the whole exchange is gone down, no threat exist for the users coins since these platforms are based on blockchain and all the data are stored there. No unique entrance from which hackers can penetrate into the system has made it very hard for hackers and the concept of cyber attack has lost its meaning. This is why such platforms are totally different from the centralized ones which are constantly under cyber-attacks.
Low risk of price manipulation
in the absence of a united structure which tends to manipulate the prices in favor of the exchange, the possibility of wrong pricing or manipulation is very low. There is no personal account on decentralized exchanges, no identity proof will be asked, and even you don’t need to put in your email address. Therefore, no personal data of the user can be stolen.
This structure provides services base on distributed ledger in a more unknown way compared to that of centralized exchanges which need identity approval to prevent money laundering.
Independent from the lawmakers
the distributed structure of such exchanges to prevent local and international authorities from intervening. This happens when in centralized structures, following the rules can block portions or all of an exchange parts. In this way, exchanges will be limited geographically.
Accessing different projects
Just the opposite of the its centralized brother, decentralized crypto exchanges no only provide their users with the possibility of putting orders for existing cryptocurrencies, but they are allowed to create cryptocurrencies inside the system. This feature enables start ups to work with low cash flow with the need to use the main platforms with high costs.
Disadvantages of decentralized crypto exchanges
The distributed architecture of such exchanges and the fact that users have complete maintenance of their assets, comes with difficulties as well.
The impossibility of access recovery
For instance, since there is no identity confirmation and the fact that a transaction can be canceled because you have lost your private or public key, accessing your assets is practically impossible. Recovering the capital is not in sync with distributed ledger so if someone makes mistakes when doing a transaction, they can not retrieve their assets.
Options like stop loss, marginal trade or lending is not available for most of decentralized exchange’s users. Since most of decentralized exchanges are managed by smart contracts, cryptos which do not support such contracts, cannot be traded.
Low cash flow
Decentralized exchanges have a very low cash source compared to their centralized version. For instance, bit share has only 197 bitcoins traded per day where Binance have more 227000 BTC transactions.
Such differences happen since users prefer centralized exchanges due to their available tools, crypto pairs and more and bigger orders. Therefore, there few users who will go to such place because of their low cash flow and it becomes a vicious circle since without having traders, you can’t achieve high cash flow.
in decentralized exchanges just like the centralized version, in case of the influx of people to trade, problems like high entry traffic, occurring delay, increasing commission and many other problems that you may familiar with when working with centralized crypto exchange.
Transactions on blockchain need a lot of time to be checked and confirmed and the time of their process totally depends on miners and the exchanges are not involved.
Now you can say that you know a great deal about decentralized crypto exchanges. We will talk more about them, meanwhile you can leave your comments below.