A decentralized exchange (commonly referred to as DEX) is an exchange that operates on the basis of a distributed ledger, does not store users’ funds and personal data on its servers, and acts only as a platform for purchase, sale or swapping of users’ digital assets. Trading on such platforms takes place directly between participants (peer-to-peer) without any financial intermediaries.
At the same time, most of the existing exchanges that call themselves decentralized, in fact, are not completely like that: they use their own servers to store data on trades and orders for the purchase or sale of user assets, but the private keys are kept by the users themselves.
How Are Decentralized Exchanges Different From Centralized Ones?
Centralized exchanges are run by a specific company or person that is profit-oriented. Managing exchanges are responsible for protecting user data and information about trading, fully control the operation of the platform and independently make decisions that are important for the development of the project.
Decentralized exchanges are managed automatically with platform participants solely making trades or swaps. Such platforms provide the technical possibility of direct interaction between participants and use a distributed ledger (blockchain) to store and process all transactions.
What Are The Main Advantages Of Decentralized Exchanges?
Most of the strengths of decentralized exchanges stem from their distributed architecture and lack of a unified control center. Here are some advantages:
Decentralized exchanges provide complete user anonymity;
A decentralized exchange does not store user assets, therefore, neither hacker attacks nor a complete collapse of the exchange itself poses a threat to your funds, which radically distinguishes them from centralized exchanges, which are hacked quite regularly;
There are no personal accounts on the decentralized exchange, no verification is required, and you don’t even need to provide email, so no one can use or steal personal data of users;
The decentralized exchange has no management interested in manipulating prices within the exchange;
Thus, decentralized exchanges leave users full control over their funds, applications and data, and at the same time full responsibility for their actions.
Which Decentralized Exchanges Are Already Working?
While there are a number of decentralized exchanges, here are some notable representatives to mention a few:
Uniswap decentralized cryptocurrency exchange was established in 2018. There are currently over 1800 coins trading on the exchange with relatively low transaction fees. Uniswap makes it easy for users to exchange one ER20 token for another without the need for an intermediary.
PancakeSwap is a decentralized exchange based on Automatic market maker model (AMM). It is mainly used for swapping BEP20tokens on Binance smart chain. There are currently over 300 coins trading on the exchange.
MDEX also uses the AMM model and is based on the concept of fund pools. There are about 39 coins currently trading on the exchange. MDEX proposes and implements a DEX model based on Heco chain and Ethereum.
Bancor Network is a Switzerland based decentralized exchange with over 125 coins currently trading on the exchange. It has an automatic pricing mechanism and, therefore, no disparity between the purchase and sale prices of tokens.
Switcheo decentralized exchange has been certified by Singapore Fintech Association as a blockchain and distributed ledger provider. It currently supports about 60 coins trading with minimal fees.
Waves Exchange (also known Waves DEX) offers fast and secure trading access to major crypto assets and over 30k+ tokens on Waves protocol. The project representatives claim that at the moment the trading volumes on the platform account for more than 25% of the total trading volume on all decentralized exchanges. You can also create your own token in just a minute and only costs 1WAVES.
Decentralized exchanges are considered the most successful solution for serving the broad masses of cryptocurrency users.
Nevertheless, the problems of blockchain scaling, as well as the mass use of cryptocurrency (the so-called mass adoption), still remain unresolved. In addition, in order to attract more users, decentralized exchanges will first need to solve the problem of the complexity of the user interface and some have already done this.
Until all these problems are resolved, decentralized exchanges are likely to remain more of a niche service.