A cryptocurrency exchange is a platform that allows its users to convert the fiat currency into cryptocurrency and vice versa. The exchanges also allow the conversion between different cryptocurrency tokens. They play an integral role in the cryptocurrency industry as it would be nearly impossible to trade and use crypto tokens without them.
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Decentralized exchanges also known as DEXs, are in a stage of rapid growth at the moment. They offer an alternative for any of the user who does not want to trust a third-party with their funds
In this article, we will provide the complete guide on the Decentralised exchanges and check out its overall aspects. Let us look in detail in this review now,
What is a Decentralized Exchange?
A decentralized exchange is a platform that eliminates the middleman and allows the users to trade cryptocurrency directly with one another. This ensures that the traders are in full control of the funds at all times of the transaction.
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The decentralized exchanges eliminate the risk of hacking due to the distributed network of the nodes. They also overcome the issue of the server downtime which is faced by the users during trading.
They provide an open and transparent network that makes the crypto trading accessible to everyone. There are several decentralized exchanges that are already live and offering peer-to-peer trading across a range of cryptos.
How is a DEX different from a Centralized exchange?
In the case of the centralized exchanges, the funds and the order books are being held by the server while a transaction takes place. However, there is no involvement of a central server in case of the decentralized exchanges. This is because the participants of the transaction control the funds of the users.
It is difficult to keep the users anonymous in centralized exchanges. However, all the transactions are anonymous and are encrypted in the case of the decentralized exchanges. This enables users to enjoy their privacy without disclosing all their personal details.
The decentralized exchanges subsequently minimize the risks of hacking and server downtime due to the distributed nature of the network. The fees offered are also minimal when compared to the centralized exchanges.
Benefits of Decentralized Exchange
1) Faster and Cheaper Transactions: The decentralized exchanges are able to perform faster transactions as it eliminates the involvement of third-party. It also helps in the reduction of the overall fees associated.
2) Secure: The decentralized exchanges are comparatively safer than the centralized exchanges as the user information is not being stored on a central server. The attack remains localized even if the hacker gains access to the user’s information, instead of the whole network.
3) Integration with Hardware Wallets: The decentralized exchange provides the ability to integrate directly with a hardware wallet like Trezor and Ledger Nano S. The users can directly transfer from their hardware wallets to the smart contracts offered by the decentralized exchanges.
4) Users Control Funds: The funds are in the control of the users instead of a central authority in the decentralized exchanges. As it uses the peer-to-peer network architecture, the control of funds is always in the hands of users. The private keys remain in control of the user and are not shared with the exchange.
How does Decentralized Exchange work?
All of the decentralized exchanges work pretty much in the same manner. The working can be briefly described as follows:
Step 1: The user brings the funds like ETH, which are then stored in the form of proxy tokens in the network of the exchange.
Step 2: Then these coins function as collateral for the actual coins stored in the exchange.
Step 3: To carry out a trade, an order is sent by the client to sell the tokens in the exchange.
Step 4: Further, the proxy tokens are exchanged between the two parties.
Step 5: After receiving tokens, both parties can convert them to the actual currency, using the same trading channel or a different one.
Popular Decentralized Exchanges
IDEX is one of the popular decentralized exchanges. It is focused on trading Ethereum based ERC-20 tokens. Overall, the exchange provides a well-developed Interface and also amongst the top decentralized exchanges in terms of volume.
EtherDelta is another decentralized exchange that is specifically built for trading Ethereum ERC-20 tokens and Ethereum pairs. The entire exchange is powered by Ethereum based smart contracts. These are responsible for managing, deposits, withdrawals, and wallet integration. EtherDelta also provides a user-friendly interface.
3) Kyber Network
Kyber Network is one of the popular liquid Ethereum based decentralized exchanges for cryptocurrencies. This exchange is based on peer to peer protocol. The users can log in directly through the wallet of their choice and begin trading.
4) Bisq (BitSquare)
Bisq, unlike traditional exchanges, does not require extensive information for registration or approval from a central authority. The Traders can just download the app and instantly start trading assets. The system is peer-to-peer and free from a single point of failure. The main advantage of Bisq is probably its support for fiat currencies.
5) Bancor Network
Bancor Network is a smart contract powered decentralized exchange. It solves the problem of liquidity faced by many decentralized exchanges. Bancor has a very stable network, and the platform is less volatile. Bancor has an excellent web application with a great interface that can be used by the users to perform the simple functions of buying and selling cryptocurrencies.
Pros and Cons
- You retain control of your funds
- You do not have to trust a third party to safely manage your coins and tokens
- They provide increased privacy to traders
- No risk of server downtime
- Lower trading fees than centralized exchanges
- The decentralized nature reduces the risk of government regulation or crackdowns
- Not easy to use as conventional exchanges
- It can be confusing for the new users
- They do not provide advanced trading tools as centralized exchanges
- They do not offer as much liquidity as centralized exchanges
- Some platforms offer limited customer support
- Lack of regulation may concern some users
Decentralized Exchange Limitations
There are some functions such as margin trading, stop loss and others which are devoid by the decentralized exchanges. These features can cause some limitations in the trader’s performance.
Centralized exchanges are relatively easy to use. However, users have to pass through various smart contracts in the case of the decentralized exchanges. Hence they are not much user friendly compared to the centralized exchanges
One of the notable factors of the decentralized exchange is security. As it does not hold the funds of the users in a central reserve, they are not vulnerable to any sorts of hacks or theft. At the same time, they do not require the personal information of the users in order to protect their privacy.
The decentralized exchanges also help in reducing the trading fees as it eliminates the job of the middleman. Thus, for traders who like keeping up with crypto market trends, it is worth considering using decentralized exchanges.