The vast majority of cryptocurrency trades are occurring on centralized exchanges. The problem is that these centralized exchanges are very vulnerable to hacking and theft. They also require your credit card information which can be stolen, leaving you in an unfortunate situation. Decentralized exchanges do not require your credit card information and they allow you to trade with others anonymously.
Introduction: What is Decentralized Exchange?
Decentralized exchanges (DEX) are a type of cryptocurrency exchange. Like centralized exchanges, DEXs allow for the trading of cryptocurrencies and tokens. However, they function in a decentralized manner, meaning that they do not require a third-party intermediary to hold the investor’s funds and execute trades. Instead, transactions occur directly between users (peer-to-peer), hence the name “decentralized”.
Decentralized Exchange (DEX) is an online platform for buying, selling and trading assets in one place, with no centralized company functioning as the intermediary or custodian of funds.
To trade or exchange one cryptocurrency with another it is possible to use exchanges. Even though Centralized Exchanges (CEXs) allow large-scale trades with lots of liquidity, the those who use these platforms don’t have total control over their assets, placing their assets in danger in the event that their exchanges are attacked and fail to pay their debts.
The decentralized exchanges (DEXs) seek to resolve this problem by allowing people to trade cryptocurrencies and not give the custody of their currency. With no funds stored on exchanges with centralization the users don’t have to trust exchanges to remain financially viable. DEXs function through smart contracts as well as on-chain transactions that reduce or eliminate the necessity to use an intermediary.
What does a decentralized exchange function?
Exchanges that are decentralized (DEX) can be described as in a way similar to central exchanges, but in a way, they’re significantly different. There are many types of decentralized exchanges that are available to users. What they share is that they execute orders through the blockchain (using smart contracts) and that users don’t have to be able to trust their money to anyone. What exactly is decentralized exchange and how does it function?
Blockchain-based decentralized exchanges and blockchain books
In some exchanges that are decentralized that operate on a blockchain. Every transaction is recorded on the blockchain. This is thought to be the most transparent since customers don’t trust any other person to send orders and, therefore, they aren’t affected by any means.
However, this method isn’t the best option. Since users have to ask all nodes of the network to record their transactions, they are paying a fee to do this. In addition, they must wait until the miner has added transactions to blockchain this can be a problem.
Some examples of exchanges decentralized that use blockchain order books include Stellar as well as BitShares.
Order books and decentralized exchanges that are not on the blockchain
DEXs that have off-blockchain order books are much more central than those discussed earlier. Instead of every order getting added to blockchains, these are kept in a different location. The order books can be completely managed by a centralised organization. If that entity proves to be untrustworthy they could influence the markets to some extent. But, there is the advantages of self-storage for funds.
The 0x protocol that is used for ERC-20 along with other tokens that are on the Ethereum blockchain is a great illustration of this kind. It’s not an exchange, but instead serves as an environment for those who manage the order books. Utilizing 0x smart contracts as well as additional tools, the parties have access to an exchange pool and transfer orders between users. The transaction can be executed on the blockchain when a buyer/seller pair has been confirmed.
This is more efficient than using order books on blockchain. It is not subject to the same speed restrictions in this case. The final transaction is made on the blockchain, which means orders books on the blockchain still are slower than central exchanges.
Why use a decentralized exchange?
There are four major reasons to think about the use of a decentralized cryptocurrency exchange instead of one that is centralized.
Centralized exchanges have large amounts of money from investors which makes them a prime attack for hackers.
The year 2015 was the year that Bitstamp an exchange in Slovenia was targeted by an unknown hacker who managed access to get access to Bitstamp’s hot account and snatch nearly 19,000 Bitcoins (worth around $5 million in the year at). The most well-known bitcoin hack of all time was Mt. Gox an exchange for cryptocurrency that has been shut down.
Due to the growing volume of trading of cryptocurrencies, central exchanges are increasingly attracted to hackers. Decentralized exchanges are becoming more accessible and popular while also providing greater security to investors.
2. Control of your funds
Hacking isn’t the sole issue that centralized exchanges face; In these environments, the users don’t have total control over their money, however, the exchanges that are centralized have complete control over their funds, but the exchanges. This could result in a variety of restrictions and financial losses for investors.
In January of this year cryptocurrency exchange HitBTC began to freeze accounts of users, allegedly ahead of an event planned by users who were to take all of their crypto funds from central exchanges in one day. The event, dubbed ” Proof of Keys” was a move from the community of crypto enthusiasts to guarantee that exchanges will make good on deposits, which is similar to the bank’s run.
Again, the non-custodial character of DEXs implies that the funds remain in your control and that the central authorities are not able to freeze or deny access to the funds. If the exchange shuts down on a day like tomorrow, your accounts remain unaffected since you’ve kept them in your possession.
Centralized exchanges are classified as money-service providers (MSPs) in a variety of jurisdictions, which means that clients are required to go through obligatory know-your-customer (KYC) as well as the anti-money-laundering (AML) screenings. However, in many instances customers aren’t willing to divulge their personal information to third parties, because they are not in influence over how they interact to their personal data, and how authorities — whether they are domestic or foreign, get an understanding of the data.
Decentralized exchanges on the other hand, aren’t subject to any central oversight; consequently there aren’t any registration requirements to use the exchange other than having an address for the wallet.
4. Financial inclusiveness
In response to growing pressure from regulators, many central trading platforms have restricted their access to customers in specific countries. Recently exchanges have begun to withdraw from offering services to US customers, because of the risk of being viewed as offering unregulated trading in securities. On June 1, Binance made it clear that it would block US clients from the platform in advance of launching plans to create an American-specific, compliant exchange. Other exchanges like Bittrex have removed several tokens from US customers.
Decentralized exchanges provide a means to anyone in any place to trade in cryptocurrency, because they’re not controlled by a central authority which is subject to a shutdown decision. Investors can put in however little they like to gain from trading as well as the peer-to peer transaction cost is much less than the traditional exchanges.
The Cons: Are there any disadvantages to this type of exchange
User interfaces that are more complicated
Navigating decentralized exchanges will require some specific knowledge, and the interfaces aren’t always simple -prepare to do lots of study and don’t expect to expect the DEX itself to provide much assistance. You’ll usually have to go elsewhere for a walk-through or an explanation.
Another problem that’s common is referred to by the term “impermanent loss,” which could result from combining the more volatile cryptocurrency with a less volatile cryptocurrency in an liquidity pool. (The most important thing to remember is: Do your own study.)
Smart contract vulnerabilities
Any Smart contract that runs DeFi is as safe as the ones which underpin it. And the code may have vulnerabilities that can be exploited (despite the long tests) that could result in losing your coins. Even though the smart contract may function according to its intended purpose under normal conditions however, some rare events like human-caused factors, human errors, and hacks are anticipated by the developers.
More risky coins
With the untested, massive range of tokens that are available on the majority of DEXs Additionally, there is many frauds, schemes and scams to be aware of. If a token is in a high-risk phase may suddenly “rug pulled,” when its creator creates a lot number of coins, thereby consuming the liquidity pool, and devaluing its value.
Actually, DEXs aren’t nearly as user-friendly as traditional exchanges. Centralized platforms allow for real-time trading which are not affected with block time. For those who are new to other cryptocurrency wallets that are not custodial, CEXs are a better experience. If you forgot the password you are able to just reset it. If you do not remember your password’s seed phrase but you do not lose it your money is irreparably lost to cyberspace.
The volume of trading and the liquidity
In a market that is highly liquid, bids and requests are not significantly different in value, which indicates a an intense the level of competition between sellers and buyers. In a highly liquid market it will be more hard time finding someone who is willing to trade the asset at a fair cost.
The fees don’t always more expensive on DEXs However, they may be, especially when the network is overloaded or you’re using an online order book.
What are some popular decentralized exchanges?
Curve is a decentralized liquidity pool for exchanges that is based on Ethereum. It is specifically designed to meet the needs of:
very efficient, with high efficiency, low slippage, stable and reliable coin trading
Fee income with low risk for liquidity providers
The term slippage refers to what is the gap between anticipated price of a transaction in relation to the rate at which the deal was executed.
The fee along with other aspects are determined through the Curve Decentralised Autonomous Organization (DAO). The cost for all pool is 0.04 percent. The majority of the fee is paid towards the providers of liquidity, and the remaining portion goes to DAO members. DAO.
All Value Locked Up: $21 Billion (roughly 1.58,569.45 crore). 1,58,569.45 crore)
Mcap/TVL ratio: 0.06
Uniswap is a distributed network for automatic liquidity provisioning on Ethereum.
One of the biggest issues with illiquid trading on exchanges that can be “high spreads.” Uniswap solves this issue by allowing anyone to become market maker. Uniswap has a high rate of rate of slippage when large orders are placed because the cost of making a purchase rises with the increase in the amount.
Total Value Locked Total Value Locked: $9 billion (roughly about Rs. 67,958.33 crore)
Mcap/TVL ratio: 0.8
PancakeSwap operates as an automatized market maker and yield farming that is part of the Binance Smart Chain (BSC). While PancakeSwap is an offshoot of SushiSwap it allows quicker and cheaper transactions due to the fact that it is based on BSC.
PancakeSwap also offers lotsteries, yield farming, and farm-based offerings for the first time.
All Value Locked Up: $7.7 billion (roughly Rs. 58,142.13 crore)
Mcap / TVL ratio 0.4
Sushi Swap is a protocol that is decentralized to provide automatic liquidity to Ethereum. It’s a decentralised exchange as well as a decentralised loan market. It also allows yield instruments and derivatives staking. In the latter half of 2020 Yearn.finance as well as SushiSwap announced the formation of a joint venture in which they will have the same development resources, however keep separate governance and tokens.
The Total Value Locked is $5.5 billion (roughly Rs. 41,530.09 crore)
MCap TVL ratio: 0.2
Balancer is a custodial, automated investment manager as well as a trading system. In a standard index funds, the buyer is charged a fee to a portfolio manager to rebalance the portfolio. In Balancer the investor receives fees from traders who balance their portfolios in order to take advantage of the arbitrage opportunities.
The Total Value Locked is $3 Billion (roughly the equivalent of Rs. 22,652.78 crore)
Mcap / TVL ratio 0.05