Hopium Defi
Decentralized exchange, or DEX, is a digital currency exchange that enables users to transact cryptocurrencies through direct peer-to-peer blockchain transactions without the need for any intermediary. The DEX features differ from the traditional centralized exchange, where an average transaction involves third-party services that accompany custody of the user’s funds, and facilitate the transfer of assets between the two parties.
Decentralization is a fundamental ideology of blockchain technology and the blockchain space. It restructures the authority of centralized power and allocates it to the hands of the community or users. And the idea of decentralization is reorganizing many traditional financial services operations.
How Decentralized Exchange Work?
A decentralized exchange is a platform that enables users to transact assets without the need for an intermediary. With decentralized exchange, a distributed ledger, or a blockchain takes the place of the third party. By moving important operations into a blockchain, the technology may assist to remove single points of failure, permitting users to obtain greater control over their assets and promoting transparent and safer transactions.
Decentralized exchange uses smart contracts to execute blockchain transactions by allotting transactions operation to autonomous code, but there are several differences in order fulfillment with layers of degrees of decentralization. Same to digital currencies, decentralized exchanges were built to address the flaw of the archaic financial systems that handed the risks of a centralized system to its user base. And those risks often include technical issues, insufficient security, and lack of transparency.
Advantages of Using a Decentralized Exchange
There are numerous reasons why the blockchain community has adopted and embraced the idea of a decentralized exchange.
The following are the pros of using a decentralized exchange:
No KYC or ID verification: Decentralized exchanges are trustless, meaning users’ privacy, funds, and transaction personal data are well preserved. A decentralized exchange userbase can securely, and smoothly access a DEX without the requirements of creating a centralized exchange account, undergoing the KYC process, or providing any personal information.
No counterparty risk: Users do not have to move their assets to exchange, and decentralized exchanges reduce the risks of lost funds due to hacks. Decentralized exchanges can also stop fake trading volume or price manipulation, and enable users to sustain a level of anonymity due to the lack of KYC rules and regulations.
All tokens can be traded: With a decentralized exchange, users can transact obscure and new cryptocurrencies that may be hard to exchange elsewhere. Naturally, centralized exchanges only support a handful of tokens, and most of them are only categorized as popular cryptocurrencies, making less popular and smaller project tokens hard to trade.
Reduced security risk: As stated, decentralized exchanges are more secure than their centralized counterparts. The main reason is that no single party is in charge of the assets, as smart contracts and decentralized applications automate all the transactions. The user possesses custody of their assets, making it difficult for hackers to penetrate assets.
Utility in the developing countries: Several parts of the world have a huge deficit in basic financial services, making it a huge advantage of decentralized exchanges, as they can be used by any individual in any part of the world regardless of the state of their country’s financial infrastructure. In fact, decentralized exchanges may be the missing puzzle for developing countries that will give way to transact assets in a borderless manner.
Final Thoughts
Decentralized exchanges are a permissionless and trustless platform that enables users to buy and sell cryptocurrencies without the need for an intermediary. Although complete decentralization is not yet a certain reality, there are several types of decentralized exchanges that provide layered levels of privacy, efficiency, and security from which users can select.
As technology continues to progress and become more practical, users’ mass adoption may become a pivotal point as DEXs seek to offer better liquidity. With all being said, the good news is decentralized exchanges present not only one, but several ways to get involved in the blockchain space. Meaning sooner or later, we might be able to see the mass adoption we are all been waiting for.