What are Cryptocurrency Exchanges?

Exchanges for cryptocurrencies are websites that allow trades between digital and fiat assets, including cryptocurrencies. By making money from commissions and transaction fees, cryptocurrency exchanges effectively serve as intermediaries between sellers and buyers.

The exchange of $100 for bitcoins of equivalent value can be done on most cryptocurrency exchanges. Ethereum of equal weight can also be exchanged for bitcoin worth $100. Depending on what the business offers, the same concept can apply to different assets.

Decentralized exchanges have many advantages.

Several reasons contribute to the popularity of decentralized exchanges among crypto enthusiasts and followers. Among the highlights are:

A user-friendly interface

Beginner investors can trade and invest in cryptocurrencies using centralized exchanges, which are familiar and friendly. Comparatively, centralized exchanges can be accessed through applications and websites without using crypto wallets and peer-to-peer transactions, which can be complicated.

Indestructible

Investing and trading on centralized exchanges are more secure and reliable. Centralized exchanges offer greater levels of comfort because they facilitate transactions through a developed, centralized platform.

Identification verification or KYC is not required.

In DEXs, funds, privacy, and a limited amount of personal information are well protected. Users do not need to create an account on the exchange, undergo identity verification, or provide personal information to access a DEX.

The risk of counterparties is eliminated.

In addition to minimizing the risks of hacks and theft of funds, decentralized exchanges do not require users to move their assets to exchange. Due to the lack of Know Your Customer (KYC) crypto rules and regulations, DEXs can also prevent price manipulation or fake trading volume.

It is possible to trade any token.

DEXs let users trade new cryptocurrencies that have been difficult to change elsewhere, whether with the DEX or a DApp (decentralized application) created along with them. In practice, centralized exchanges primarily support a dozen or so tokens. Most only support popular cryptocurrencies, making it more challenging to trade more small, less popular tokens, largely when foreign users are restricted from using centralized exchanges.

Adoption of DEX: Challenges

Adopting decentralized exchanges is inevitable because they offer superior technology, lower blockchain security risks, and self-custody of funds. DEXs are not yet mainstream, so what is holding them back? Many DEXs are expected to be launched and become increasingly popular between 2019 and 2020, but some factors may hinder adoption.

Investors are often unaware of:

Centralized exchanges are at risk for security issues

As a form of security, self-custody can be used

Self-custodian funds (managing private keys): How to protect them

Decentralized exchanges

 

A decentralized exchange has several advantages.

Technical barriers to entry also exist for DEXs:

  • Too confusing for users

A high volume of traffic can cause network congestion

It takes time for transactions to be validated on blockchains using current network iterations

During high traffic periods, there are higher transaction fees

Only DEX users with high liquidity will be allowed to join

Defi platforms must work across chains for interoperability

Token prices should be less volatile, and there should be fiat on-ramps

Types of decentralized exchanges

In its most complete form, decentralization is more of a philosophy than a practical rule, as first-layer blockchains don’t scale very well. To exchange assets, most decentralized exchanges use off-chain order books and their computers to run semi-decentralized operations. The reliance on centralized components means that semi-decentralized businesses require government oversight. The most important aspect is that users retain control of their private keys.

In addition to operating cross-chain, DEXs operate on the identical blockchain with other DApps. In addition, all decentralized exchanges use intelligent contracts to execute orders on-chain instead of holding funds.

Order books on the chain

On some decentralized exchanges, everything, including orders modified and canceled, is processed on the chain. It is the most decentralized and transparent process since it avoids relying on a third party at any point in time for any orders. It is not practical to execute this approach.

When placing all stages of order onto the blockchain, DEXs ask every node to store it permanently and charge a fee for the privilege.

Observers argue that the slow transaction times of decentralized crypto exchanges allow an investor to front-run–buying or selling at the last minute, depending on whether they predict the price will rise or fall.

Others counter that since orders are published on a public ledger, shareholders are no exclusive opportunities to front-run. However, it has been debated whether a miner can front-run by noting an order before it’s confirmed and forcing their own to appear on the blockchain before another’s.

An Off-Chain Order Book

While off-chain order books remain partially decentralized, they are more centralized than on-chain exchanges. The off-chain order book is maintained elsewhere as opposed to on the blockchain. Despite this threat, DEX’s non-custodial model still protects users’ funds from front-running or misrepresenting orders.

Ethereum tokens offer a DEX similar to some ERC-20 tickets. A DEX provides a framework for parties to manage off-chain order books through smart contracts, even if some decentralization is sacrificed. Traders can then relay orders between hosts who have access to a larger liquidity pool. Trades can be executed on-chain as soon as the parties are matched.

It can be more expensive and time-consuming to rely on on-chain order books than to use these models. Off-chain order books offer faster speeds with less congestion from block iterations.

Final Words

Best Digital Currency Exchange lets users buy and sell crypto without exposing their assets to third parties and are a trustless solution. DEXs offer additional security, privacy, and efficiency levels, even if complete decentralization is not yet possible.

To siphon liquidity from other markets, DEXs will have to rely on user adoption to become more practical and popular.