In the world of cryptocurrencies, cryptocurrency exchange holds immense power as they are the backbone of this market. For every tradable asset to trade requires a market where it can take place. This is exactly what an exchange does.
DEX: Facilitating the crypto commerce without an intermediary
Most of the cryptocurrency trading is done through a centralized cryptocurrency exchange. A few of the popular examples are Binance, Coinbase, and Bittrex. This is one type of exchange where it manages an individual’s capital along with his/her private keys and then performs trading.
However, over the last few years, there has been numerous high profile scams and hacks that resulted in the loss of billions of money. The increased complexity of the hardware and software only make these centralized exchanges more vulnerable.
This is where the decentralized exchanges come into the picture.
The most obvious week point in this scenario is the need to trust a third party i.e. a middleman for your funds. For cryptocurrencies to achieve its decentralized objective, it needs the decentralized exchanges in place for that.
Decentralized Exchange or DEX is a new technology in the cryptocurrency sphere that has no central controlling server. It basically facilitates the cryptocurrency trading on a distributing ledger. Hence, you don’t need a third party intermediary to hold your funds when making an exchange transaction.
In these exchanges, the user has been given back the control of funds and the confiscation of funds is quite impossible. However, the technology is still young and undergoing development.
How does it work?
In decentralized exchanges, the absence of reliance on the third party allows the trade to occur directly between two users via an automated process.
In DEX, you simply submit your request to buy or sell and create a sort of order book while on the other end an interested party will digitally sign it to create a counterorder. Now, both of the orders will be sent on the blockchain to a smart contract where the transaction execution will take place. Subsequently, the cryptocurrency will be transferred to the wallet of the user.
You would be in complete control of your assets all the time. A personal key is also provided to you in case you need to withdraw your funds from the blockchain
A glimpse of DEX’s merits and shortcomings
Decentralized cryptocurrency exchanges certainly provide cheaper, faster and of course cost effective transactions. Given the growing hacks in the crypto market, the reduced susceptibility of these exchanges to these hacks is an attractive feature. No central corporation holds your funds rather you are the one with the custody of your deposits. Not to mention, a lot of these decentralized exchanges offer a seamless integration with some popular hardware wallets.
However, due to being new to the market, these exchanges lack rigorous functionality and characteristics, hence, provides only the basic exchange services. Moreover, they can be a bit difficult to use as they have numerous smart contracts that have to be navigated.
Decentralized exchanges or DEX are still in development stage but they certainly back an innovative idea that is the need of the cryptocurrency market right now.
What are your thoughts on decentralized exchanges? Share your thoughts with us!