A decentralized exchange is regarded as an integral part of the cryptocurrency market, and present exchanges show a weak link in the decentralization idea.
There are four core functions of an exchange namely capital deposits, asset exchange, order matching, and order books. For you to create a decentralized exchange (DEX), you must decentralize each of these core functions. Most of the times, we often have only the asset exchange decentralized since they symbolize cryptocurrencies system on the blockchain devoid of central entity control. The other three functions are often centralized.
Due to guidelines like the AML (Anti-Money Laundering) and KYC (know your customer) exchanges are mandated to demand users’ identities before capital deposits. A centralized exchange permits users to transact currencies instead of creating an open system that doesn’t require permission.
In contrast, decentralization is termed as a lack of centrally-controlled server(s) with the network nodes distributed. Presently, we have Blocknet “BlockDX,” as the only true decentralized exchange.
Types of Decentralized Exchanges
There are two types of decentralized exchanges DEX. They are both centered on currencies transaction. The two basic decentralized exchanges are namely, currency-centric and currency-neutral. The beauty of these two models is that they can both be centralized or decentralized based on the handling of the four basic exchange functions are handled.
Ethereum is an example of currency-centric exchanges, and it’s based on singular blockchain platforms. A currency-centric transfer is developed in such a way that it utilizes the old model of escrowing only the currency like the ERC20 assets.
Currency-neutral, on the other hand, is a modern model developed to link different natural cryptocurrencies. The result of this is that users won’t be restricted to any particular currency ecosystem. The system gives users the freedom to trade cryptocurrencies without using the coin as a “middleman” to affect trading since it is no more peer-to-peer entirely.
Examples of currency-neutral include bisq, altcoin.io, and flyp.me. These newer models allow users to securely match and handle order books, and not asset exchange alone in a decentralized manner, which is carried out with the blockchain.
Benefits of DEXs
Trading with DEX has several advantages that make it look attractive to most cryptocurrency users. A notable benefit is its elimination of middlemen and permits free, direct trade amongst parties.
Below are exciting benefits of DEXs which an average user gets to enjoy.
Since DEXs makes use of only blockchain data, you are required to give only a public address to use DEX. Therefore, you won’t have to go through the cumbersome process of signing up with your name, credit account information and email address.
• Control of Funds
Users operating with DEX have full control of their funds throughout the transfer process until the point of exchange. For DEX you are entirely responsible for your fund’s safety.
DEX protects from hackers by adding extra security levels.
There is a very slim chance of you undergoing downtime in DEX since there isn’t any failure point in a distributed exchange.