Introduction To Decentralized Exchanges (DEX): The Future of Crypto Trading
Decentralized exchanges (DEXs) are getting bigger and more of them are appearing by the day. These are free markets where the organization does not have the slightest control over funds.
What are decentralized exchanges?
Instead of a centralized exchange, where one organization controls all transactions, with a decentralized one, users have the opportunity to engage in trade with other users.
In contrast to a centralized exchange, a decentralized exchange is a community-driven concept.
It is the purpose of decentralized exchanges to be able to create trade opportunities between buyers and sellers where no central organization is needed.
We are not talking about regular decentralized exchanges such as IEX. That is a market for high-frequency traders. These are exchanges that are managed by computers. Before we talk about the implementation of security and regulation requirements for trading on a DEX, we should discuss how trading on a decentralized exchange works.
Advantages of DEX
There are many advantages to DEXs. Not only do you get decentralized security, you also have decentralization. There are no servers or any nodes to get hacked. Also, there is very little downtime.
It seems like a no-brainer to run a DEX.
Why are there not many DEXs?
I would say that there is not enough demand from traders for decentralized exchanges. In my opinion, there are a lot of companies that have little to no experience in trading crypto.
The main challenge of building a DEX is that one has to design an exchange that does not need any setup for security.
How do decentralized exchanges work?
They are built on a new cryptocurrency network called the blockchain.
You can think of this as an alternate internet.
The whole point of a decentralized internet is to remove government control, censorship, and costs.
That’s because, with centralized exchanges, you have middlemen between buyer and seller.
This means that the exchanges become a bottleneck in the Bitcoin ecosystem and slow down the number of people who can buy or sell Bitcoin.
For example, if you look at Coinbase, it’s an online exchange where people can sell and buy Bitcoin.
There are some drawbacks though, such as the 2% fee that you pay every time you buy or sell.
If you check it out on Coinbase, you will notice there is a limit of transactions a month.
Why do we need decentralized exchanges?
There are many pros and cons, but basically, they’re really good for consumers. Imagine paying a fixed commission on each trade? On a centralized exchange, it is the case. Even after paying a fixed commission, these exchanges still make enormous profits with the exchanges like Coinbase, Kraken, Bitstamp, and CEX.IO.
Because centralized exchanges are often preferred by small traders, oftentimes they limit their clients to a fixed amount to avoid scalping.
If you’re paying the fee to buy a coin at a regulated exchange, then you will not be able to buy that coin at a DEX that doesn’t charge fees and trade coins that are illegal in your country. This can be life-threatening for users as the regulations in your country might be very strict, for example in China or Germany.
Security and regulation requirements for trading on a DEX
We believe that all security risks with decentralized exchanges will fade away as users experience reliable trading activity.
Decentralized exchanges have the same legal framework as centralized exchanges, in fact, they are going to get more accessible and more user-friendly. The implementation of DEX regulation and security requirements for trading on a DEX is something we must invest in.
Zero-confirmation and 100% Trustless. This is the concept of decentralized exchange or trading on a decentralized exchange.
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